Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-K, Received: 10/28/2009 13:00:57)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 3, 2009
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
incorporation or organization)
Identification No.)
   
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
   
Securities registered pursuant to Section 12(b) of the Act:
   
Title of each class
Name of each exchange on which registered
Common Stock, par value $.10 per share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   x    No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨    No   x

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   ¨

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 (ss232.405 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   ¨    No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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:
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   ¨    No   x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of such stock on March 5, 2009, as reported by the New York Stock Exchange, was approximately $1.4 billion.  Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s common stock as of October 20, 2009, was 849,823,817.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for registrant’s 2009 Annual Meeting of Shareholders to be held on December 10, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 



 
 

 

PART I

Item 1.   Business

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements include, but are not limited to, statements such as those made in “Overview” regarding royalty payments from Nanya, Inotera’s transition to the Company’s stack process technology and gross margins from the Company’s imaging wafer supply agreement with Aptina; in “Products” regarding increased sales of DDR3 DRAM products and growth in demand for NAND Flash products and solid-state drives; and in “Manufacturing” regarding the transition to smaller line-width process technologies and Inotera’s transition to the Company’s stack process technology.  The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, those identified in “Item 1A. Risk Factors.” All period references are to the Company’s fiscal periods unless otherwise indicated.


Corporate Information

Micron Technology, Inc., and its consolidated subsidiaries (hereinafter referred to collectively as the “Company”), a Delaware corporation, was incorporated in 1978.  The Company’s executive offices are located at 8000 South Federal Way, Boise, Idaho 83716-9632 and its telephone number is (208) 368-4000.  Information about the Company is available on the internet at www.micron.com.  Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to these reports, are available through the Company’s website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).  Materials filed by the Company with the SEC are also available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.  Information on the operation of the Public Reference Room is available by calling 1-800-SEC-0330.  Also available on the Company’s website are its:  Corporate Governance Guidelines, Governance Committee Charter, Compensation Committee Charter, Audit Committee Charter and Code of Business Conduct and Ethics.  Any amendments or waivers of the Company’s Code of Business Conduct and Ethics will also be posted on the Company’s website at www.micron.com within four business days of the amendment or waiver.  Copies of these documents are available to shareholders upon request.  Information contained or referenced on the Company’s website is not incorporated by reference and does not form a part of this Annual Report on Form 10-K.  In January 2009, the Company’s Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by the Company of the NYSE’s Corporate Governance Listing Standards.


Overview

The Company is a global manufacturer and marketer of semiconductor devices, principally DRAM and NAND Flash memory.  In addition, the Company manufactures CMOS image sensor products under a wafer foundry arrangement.  The Company’s products are offered in a wide variety of package and configuration options, architectures and performance characteristics tailored to meet application and customer needs.  Individual devices leverage the Company’s advanced semiconductor processing technology and manufacturing expertise.  The Company aims to continually introduce new generations of products that offer lower costs per unit and improved performance characteristics.  The Company operates in two reportable segments, Memory and Imaging.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Segment Information.”)

In 2009, 2008 and 2007, the semiconductor memory industry experienced a severe downturn due to a significant oversupply of products.  The downturn was exacerbated by global economic conditions which adversely affected demand for semiconductor memory products.  Average selling prices per gigabit for the Company’s DRAM and NAND Flash products declined 52% and 56%, respectively, for 2009 as compared to 2008 after declining 51% and 67%, respectively, for 2008 as compared to 2007 and declining 23% and 56%, respectively, for 2007 as compared to 2006.  These declines significantly outpaced the long-term historical pricing trend.  As a result of these market conditions, the Company and other semiconductor memory manufacturers reported substantial losses in recent periods.  In 2009, the Company reported a net loss of $1.8 billion after reporting net losses of $1.6 billion for 2008 and $320 million for 2007.

 
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Memory:   The Memory segment’s primary products are DRAM and NAND Flash, which are key memory components used in a broad array of electronic applications, including personal computers, workstations, network servers, mobile phones, Flash memory cards, USB storage devices, MP3/4 players and other consumer electronics products.  The Company sells primarily to original equipment manufacturers, distributors and retailers located around the world.  The Company is focused on improving its Memory segment’s competitiveness by developing new products, advancing its technology and reducing costs.

In response to adverse market conditions, the Company initiated restructure plans in 2009, primarily within the Company’s Memory segment.  In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel Corporation (“Intel”), terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month.  The Company and Intel also agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility.  In addition, the Company phased out all remaining 200mm DRAM wafer manufacturing operations in Boise, Idaho in the second half of 2009.

In 2008, the Company established a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products.  Each party generally bears its own development costs.  In addition, the Company has deployed and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya.  As a result, the Company is to receive an aggregate of $207 million from Nanya through 2010, of which the Company recognized license revenue of $105 million and $37 million in 2009 and 2008, respectively.  In addition, the Company expects to receive royalties in future periods from Nanya for sales of stack DRAM products manufactured by or for Nanya.

In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera Memories, Inc. (“Inotera”), a publicly-traded entity in Taiwan, from Qimonda AG (“Qimonda”) for $398 million.  In August 2009, the Company’s ownership interest in Inotera was reduced to 29.8% as a result of Inotera’s issuance of common stock in a public offering for approximately $310 million.  In connection with the acquisition of the shares in Inotera, the Company and Nanya also entered into a supply agreement with Inotera (the “Inotera Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya.  The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity.  Inotera’s actual wafer production will vary from time to time based on market and other conditions.   Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity, if any.  Inotera’s trench production is expected to transition to the Company’s stack process technology.  The cost to the Company of wafers purchased under the Inotera Supply Agreement is based on a margin sharing formula among the Company, Nanya and Inotera.  Under such formula, all parties’ manufacturing costs related to wafers supplied by Inotera, as well as the Company’s and Nanya’s selling prices for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers from Inotera.   (See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments – DRAM joint ventures with Nanya”)

Imaging:   On July 10, 2009, the Company sold a 65% interest in Aptina Imaging Corporation (“Aptina”), previously a wholly-owned subsidiary of the Company and a significant component of the Company’s Imaging segment, to Riverwood Capital and TPG Capital.  In connection with the transaction, the Company received approximately $35 million in cash and retained a 35% minority interest in Aptina.  The Company also retained all cash held by Aptina and its subsidiaries.  The Company accounts for its remaining interest in Aptina under the equity method.  The Company’s Imaging segment continues to manufacture products for Aptina under a wafer supply agreement.  The Company anticipates that pricing under the Aptina wafer supply agreement will generally result in lower gross margins than historically realized on sales of Imaging products to end customers.  (See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments - Aptina”)


Products

Memory:   Sales of Memory products were 89%, 89% and 88% of the Company’s total net sales in 2009, 2008 and 2007, respectively.

Dynamic Random Access Memory (“DRAM”) :   DRAM products are high-density, low-cost-per-bit, random access memory devices that provide high-speed data storage and retrieval.  DRAM products were 50%, 54% and 65% of the Company’s total net sales in 2009, 2008 and 2007, respectively.  The Company offers DRAM products with a variety of performance, pricing and other characteristics including high-volume DDR2 and DDR3 products as well as specialty DRAM memory products including DDR, SDRAM, Mobile DRAM, PSRAM and RLDRAM.

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DDR2 and DDR3:   DDR2 and DDR3 are standardized, high-density, high-volume DRAM products that are sold primarily for use as main system memory in computers and servers.  DDR2 and DDR3 products offer high speed and high bandwidth at a relatively low cost compared to other DRAM products.  DDR2 products were the highest volume parts in the DRAM market in 2009 and were 22%, 28% and 32% of the Company’s total net sales in 2009, 2008 and 2007, respectively.  DDR3 products were 7% of total net sales in 2009 and the Company expects that sales of DDR3 products will increase significantly in 2010.

The Company offers DDR2 products in 256 megabit (“Mb”), 512 Mb, 1 gigabit (“Gb”) and 2 Gb densities.  The Company offers DDR3 products in 1 Gb and 2 Gb densities.  The Company expects that these densities will be necessary to meet future customer demands for a broad array of products.  The Company offers its DDR2 and DDR3 products in multiple configurations, speeds and package types.  In connection with the Company’s acquisition of Inotera in 2009, the Company currently also offers DDR2 and DDR3 DRAM products manufactured by Inotera using a trench DRAM technology as Inotera transitions to the Company’s stack DRAM technology.

Other DRAM products:   The Company also offers specialty DRAM memory products including DDR, SDRAM, Mobile DRAM, Pseudo-static RAM (“PSRAM”) and Reduced Latency DRAM (“RLDRAM”), which are used primarily in networking devices, servers, consumer electronics, communications equipment and computer peripherals as well as memory upgrades to legacy computers.  Aggregate sales of these products were 21%, 25% and 33% of the Company’s total net sales in 2009, 2008 and 2007, respectively.  The Company offers these products in densities ranging from 64 Mb to 1Gb.

NAND Flash memory (“NAND”) :  NAND products are electrically re-writeable, non-volatile semiconductor memory devices that retain content when power is turned off.  NAND sales were 39%, 35% and 23% of the Company’s total net sales in 2009, 2008 and 2007, respectively.  NAND is ideal for mass-storage devices due to its fast erase and write times, high density, and low cost per bit relative to other solid-state memory.  The market for NAND products has grown rapidly and the Company expects it to continue to grow due to demand for removable and embedded storage devices.  Removable storage devices such as USB and Flash memory cards are used with applications such as personal computers, digital still cameras, MP3/4 players and mobile phones.  Embedded NAND-based storage devices are utilized in MP3/4 players, mobile phones, computers and other personal and consumer applications.

NAND and DRAM share common manufacturing processes, enabling the Company to leverage its product and process technologies and manufacturing infrastructure across these two product lines.  The Company’s NAND designs feature a small cell structure that allows for higher densities for demanding applications.  The Company offers Single-Level Cell (“SLC”) products and Multi-Level Cell (“MLC”) NAND products, which have two or more times the bit density of SLC products.  In 2009, the Company offered SLC NAND products in 1 Gb, 2 Gb, 4 Gb and 8 Gb densities.  In 2009, the Company offered 8 Gb, 16 Gb and 32 Gb 2-bit-per-cell MLC NAND products and began sampling 3-bit-per-cell 32 Gb MLC NAND products.  In 2009, 32 Gb MLC NAND products manufactured using industry-leading 34 nanometer (“nm”) process technology were 14% of the Company’s total net sales.  The Company offers high-speed NAND products that deliver transfer speeds up to 200 megabytes per second (MB/s) as compared to 40 MB/s for conventional SLC NAND.  These higher speeds are achieved by leveraging an ONFI 2.0 specification and a four-plane architecture with higher clock speeds.

The Company offers next-generation RealSSD™ solid-state drives for enterprise server and notebook applications which offer higher performance, reduced power consumption and enhanced reliability as compared to typical hard disk drives.  Using Micron's SLC and MLC NAND process technology, the solid-state drives are offered in 2.5-inch and 1.8-inch form factors, with densities up to 256 gigabytes and as embedded USB devices with densities up to 8 gigabytes.  The Company expects that demand for solid-state drives will increase significantly over the next few years.  The Company also offers NAND Flash in multichip packages (“MCP’s”) that incorporate NAND Flash with other memory products manufactured by the Company to create a single package that simplifies design while improving performance and functionality.


 
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The Company’s Lexar subsidiary sells high-performance digital media products and other flash-based storage products through retail and original equipment manufacturing (OEM) channels.  The Company’s digital media products include a variety of Flash memory cards with a range of speeds, capacities and value-added features.  The Company’s digital media products also include its JumpDrive™ products, which are high-speed, portable USB flash drives for consumer applications that serve a variety of uses, including floppy disk replacement and digital media accessories such as card readers and image rescue software.  The Company offers Flash memory cards in all major media formats currently used by digital cameras and other electronic host devices, including:  CompactFlash, Memory Stick and Secure Digital Cards.  Many of CompactFlash, Memory Stick and Memory Stick PRO products sold by the Company incorporate its patented controller technology.  Other products, including Secure Digital Card Flash memory cards and some JumpDrive products, incorporate third party controllers.  The Company also resells Flash memory products that are purchased from suppliers.  The Company offers Flash memory cards in a variety of speeds and capacities.  The Company sells products under its Lexar™ brand and also manufactures products that are sold under other brand names.  The Company has an agreement with Eastman Kodak to sell digital media products under the Kodak brand name.

Imaging:   The Company manufactures CMOS image sensor products for Aptina under a wafer supply agreement entered into at the time the Company agreed to sell a 65% interest in Aptina on July 10, 2009.  Imaging sales are dependent on Aptina’s ability to successfully design and market CMOS image sensor products to end customers.


Manufacturing

The Company’s manufacturing facilities are located in the United States, China, Italy, Japan, Puerto Rico and Singapore.  The Company’s Inotera joint venture also has a wafer fabrication facility in Taiwan.  The Company’s manufacturing facilities generally operate 24 hours per day, 7 days per week.  Semiconductor manufacturing is extremely capital intensive, requiring large investments in sophisticated facilities and equipment.  Most semiconductor equipment must be replaced every three to five years with increasingly advanced equipment.

The Company’s process for manufacturing semiconductor products is complex, involving a number of precise steps, including wafer fabrication, assembly and test.  Efficient production of semiconductor products requires utilization of advanced semiconductor manufacturing techniques and effective deployment of these techniques across multiple facilities.  The primary determinants of manufacturing cost are die size, number of mask layers, number of fabrication steps and number of good die produced on each wafer.  Other factors that contribute to manufacturing costs are wafer size, cost and sophistication of manufacturing equipment, equipment utilization, process complexity, cost of raw materials, labor productivity, package type and cleanliness of the manufacturing environment.  The Company is continuously enhancing its production processes, reducing die sizes and transitioning to higher density products.  The Company was transitioning its DRAM production to 50nm line-width process technology in 2009 and expects that most of its DRAM products will be manufactured using its 50nm line-width process technology in the second half of 2010.  In 2009, the Company manufactured the majority of its NAND Flash memory products using its 34nm line-width process technology.  In 2010, the Company expects to transition to a lower line-width process technology for its manufacture of NAND Flash memory products.  In 2009, the Company manufactured substantially all of its high-volume Memory products on 300mm wafers.  The Company manufactured some specialty DRAM and Imaging products using 200mm wafers.

Wafer fabrication occurs in a highly controlled, clean environment to minimize dust and other yield- and quality-limiting contaminants.  Despite stringent manufacturing controls, dust particles, equipment errors, minute impurities in materials, defects in photomasks and circuit design marginalities or defects can lead to wafers being scrapped and individual circuits being nonfunctional.  Success of the Company’s manufacturing operations depends largely on minimizing defects to maximize yield of high-quality circuits.  In this regard, the Company employs rigorous quality controls throughout the manufacturing, screening and testing processes.  The Company is able to recover many nonstandard devices by testing and grading them to their highest level of functionality.

After fabrication, silicon wafers are separated into individual die.  The Company sells semiconductor products in both packaged and unpackaged (i.e. “bare die”) forms.  For packaged products, functional die are sorted, connected to external leads and encapsulated in plastic packages.  The Company assembles products in a variety of packages, including TSOP (thin small outline package), TQFP (thin quad flat package) and FBGA (fine pitch ball grid array).  Bare die products address customer requirements for smaller form factors and higher memory densities and provide superior flexibility.  Bare die products are used in packaging technologies such as systems-in-a-package (SIPs) and multi-chip packages (MCPs), which reduce the board area required.

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The Company tests its products at various stages in the manufacturing process, performs high temperature burn-in on finished products and conducts numerous quality control inspections throughout the entire production flow.  In addition, the Company uses its proprietary AMBYX™ line of intelligent test and burn-in systems to perform simultaneous circuit tests of DRAM die during the burn-in process, capturing quality and reliability data and reducing testing time and cost.

The Company assembles a significant portion of its memory products into memory modules.  Memory modules consist of an array of memory components attached to printed circuit boards (“PCBs”) that insert directly into computer systems or other electronic devices.  The Company’s Lexar subsidiary contracts with independent foundries and assembly and testing organizations to manufacture flash media products such as memory cards and USB devices.

The Company utilizes subcontractors to perform a significant portion of its assembly, test and module assembly services.  Outsourcing these services enables the Company to reduce costs and minimize its capital investment.

In recent years, the Company has produced an increasingly broad portfolio of products, which enhances the Company’s ability to allocate resources to its most profitable products but also increases the complexity of its manufacturing process.  Although the Company’s product lines generally use similar manufacturing processes, the Company’s overall cost efficiency can be affected by frequent conversions to new products; the allocation of manufacturing capacity to more complex, smaller-volume parts; and the reallocation of manufacturing capacity across various product lines.

NAND Flash joint ventures with Intel Corporation:   The Company has formed two joint ventures with Intel to manufacture NAND Flash memory products for the exclusive benefit of the partners:  IM Flash Technologies, LLC and IM Flash Singapore LLP (collectively, “IM Flash”).  IM Flash manufactures NAND Flash memory products using NAND Flash designs developed by the Company and Intel.  The parties share the output of IM Flash generally in proportion to their investment in IM Flash.  The Company owned a 51% interest in IM Flash at September 3, 2009.  IM Flash’s financial results are included in the consolidated financial statements of the Company.

In the first quarter of 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore.  The Singapore facility has not been equipped and in October 2008 the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at the facility.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Consolidated Variable Interest Entities – NAND Flash Joint Ventures with Intel.”)

TECH Semiconductor Singapore Pte. Ltd. (“TECH”):   TECH is a DRAM memory manufacturing joint venture in Singapore among Micron Technology, Inc., Canon Inc. and Hewlett-Packard Company.  The Company owned an approximate 85% interest in TECH at September 3, 2009.  TECH’s semiconductor manufacturing facilities use the Company’s product and process technology.  Subject to specific terms and conditions, the Company has agreed to purchase all of the products manufactured by TECH.  In 2009, TECH accounted for approximately 20% of the Company’s total wafer production.  The shareholders’ agreement for the TECH joint venture expires in April 2011.  In the first quarter of 2010, TECH received a notice from HP that it does not intend to extend the TECH joint venture beyond April 2011.  The Company is working with HP and Canon to reach a resolution of the matter.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – TECH Semiconductor Singapore Pte. Ltd.”)

Inotera:     In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera.  In August 2009, the Company’s ownership interest in Inotera was reduced to 29.8% as a result of Inotera’s issuance of common stock in a public offering for approximately $310 million.   In connection with the acquisition, the Company entered into a supply agreement with Inotera.  Inotera manufactures products using a trench DRAM process technology and is expected to transition to the Company’s stack DRAM process technology.  Under the Inotera supply agreement, the Company has the right to obtain 50% of Inotera’s output (approximately 50,000 300mm DRAM wafers per month as of September 3, 2009).  The Company began receiving trench DRAM products from Inotera in the fourth quarter of 2009.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity Method Investments – DRAM Joint Ventures with Nanya.”)

Aptina Supply Agreement:     On July 10, 2009, the Company sold a 65% interest in Aptina, previously a wholly-owned subsidiary of the Company and a significant component of the Company’s Imaging segment.  Subsequent to the sale, the Company continues to manufacture Imaging products for Aptina under a wafer supply agreement.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity Method Investments – Aptina.”)


 
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MP Mask Technology Center, LLC (“MP Mask”):   The Company produces photomasks for leading-edge and advanced next generation semiconductors through MP Mask, a joint venture with Photronics, Inc. (“Photronics”).  The Company and Photronics have 50.01% and 49.99% interest, respectively, in MP Mask.  The Company and Photronics also have supply arrangements wherein the Company purchases a substantial majority of the reticles produced by MP Mask.  The financial results of MP Mask are included in the consolidated financial results of the Company.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Consolidated Variable Interest Entities – MP Mask Technology Center, LLC.”)


Availability of Raw Materials

The Company’s production processes require raw materials that meet exacting standards, including several that are customized for, or unique to, the Company.  The Company generally has multiple sources and sufficient availability of supply; however, only a limited number of suppliers are capable of delivering certain raw materials that meet the Company’s standards.  Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases, lead frames, molding compound and other materials.  In addition, any transportation problems could delay the Company’s receipt of raw materials.  Although raw materials shortages or transportation problems have not interrupted the Company’s operations in the past, shortages may occur from time to time in the future.  Also, lead times for the supply of raw materials have been extended in the past.  If the Company’s supply of raw materials is interrupted, or lead times are extended, results of operations could be adversely affected.


Marketing and Customers

The Company’s products are sold into computing, consumer, networking, telecommunications, and imaging markets.  Approximately 30% of the Company’s net sales for 2009 were to the computing market, including desktop PCs, servers, notebooks and workstations.  Sales to Intel, primarily for NAND Flash from the IM Flash joint ventures, were 20% of the Company’s net sales in 2009 and 19% of the Company’s net sales in 2008.  Sales to Hewlett-Packard Company were 10% of the Company’s net sales in 2007.

The Company’s Memory products are offered under the Micron, Lexar, Crucial and SpecTek brand names and private labels.  The Company markets its semiconductor products primarily through its own direct sales force and maintains sales offices in its primary markets around the world.  The Company maintains inventory at locations in close proximity to certain key customers to facilitate rapid delivery of products.  The Company sells Lexar-branded NAND Flash memory products primarily through retail channels and its Crucial-branded products primarily through a web-based customer direct sales channel.  The Company’s products are also offered through independent sales representatives and distributors.  Independent sales representatives obtain orders subject to final acceptance by the Company and are compensated on a commission basis.  The Company makes shipments against these orders directly to the customer.  Distributors carry the Company’s products in inventory and typically sell a variety of other semiconductor products, including competitors’ products.

The Company offers products designed to meet the diverse needs of computing, server, automotive, networking, security, commercial/industrial, consumer electronics, medical and mobile applications.  Many of the Company’s customers require a thorough review or qualification of semiconductor products, which may take several months.  As the Company further diversifies its product lines and reduces the die sizes of existing products, more products become subject to qualification which may delay volume introduction of specific devices by the Company.


Backlog

Because of volatile industry conditions, customers are reluctant to enter into long-term, fixed-price contracts.  Accordingly, new order volumes for the Company’s semiconductor products fluctuate significantly.  Orders are typically accepted with acknowledgment that the terms may be adjusted to reflect market conditions at the date of shipment.  Customers can change delivery schedules or cancel orders without significant penalty.  For these reasons, the Company does not believe that its order backlog as of any particular date is a reliable indicator of actual sales for any succeeding period.



 
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Product Warranty

Because the design and manufacturing process for semiconductor products is highly complex, it is possible that the Company may produce products that do not comply with customer specifications, contain defects or are otherwise incompatible with end uses.  In accordance with industry practice, the Company generally provides a limited warranty that its products are in compliance with Company specifications existing at the time of delivery.  Under the Company’s general terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts paid for such items.  Under certain circumstances, the Company provides more extensive limited warranty coverage than that provided under the Company’s general terms and conditions.


Competition

The Company faces intense competition in the semiconductor memory markets from a number of companies, including Elpida Memory, Inc.; Hynix Semiconductor Inc.; Samsung Electronics Co., Ltd; SanDisk Corporation; and Toshiba Corporation.  Some of the Company’s competitors are large corporations or conglomerates that may have greater resources to withstand downturns in the semiconductor markets in which the Company competes, invest in technology and capitalize on growth opportunities.  The Company’s competitors seek to increase silicon capacity, improve yields, reduce die size and minimize mask levels in their product design resulting in significantly increased worldwide supply and downward pressure on prices.


Research and Development

The Company’s process technology research and development (“R&D”) efforts are focused primarily on development of successively smaller line-width process technologies which are designed to facilitate the Company’s transition to next generation memory products.  Additional process technology R&D efforts focus on the enablement of advanced computing and mobile memory architectures, the investigation of new opportunities that leverage the company’s core semiconductor expertise, and the development of new manufacturing materials.  Product design and development efforts are concentrated on the Company’s high density DDR3 and mobile products, as well as high density and mobile NAND Flash memory (including MLC technology), specialty memory products and memory systems.  The Company’s R&D expenses were $647 million, $680 million and $805 million in 2009, 2008 and 2007, respectively.

To compete in the semiconductor memory industry, the Company must continue to develop technologically advanced products and processes.  The Company believes that expansion of its semiconductor product offerings is necessary to meet expected market demand for specific memory and imaging solutions.  The Company’s process development center and largest design center are located at its corporate headquarters in Boise, Idaho.  The Company has several additional product design centers in other strategic locations around the world.  In addition, the Company develops leading edge photolithography mask technology at its MP Mask joint venture facility in Boise.

R&D expenses vary primarily with the number of development wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs.  Because of the lead times necessary to manufacture its products, the Company typically begins to process wafers before completion of performance and reliability testing.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability.  R&D expenses can vary significantly depending on the timing of product qualification.  The Company and Intel share R&D process and design costs for NAND Flash equally.  The Company and Nanya also jointly develop process technology and designs to manufacture stack DRAM products with each party bearing its own development costs.



 
7

 

Geographic Information

Sales to customers outside the United States totaled $3.9 billion for 2009 and included $1.2 billion in sales to China, $542 million in sales to Malaysia, $470 million in sales to Europe, $447 million in sales to Taiwan, and $990 million in sales to the Asia Pacific region (excluding China, Malaysia and Taiwan).  Sales to customers outside the United States totaled $4.4 billion for 2008 and $4.0 billion for 2007.  As of September 3, 2009, the Company had net property, plant and equipment of $4.7 billion in the United States, $2.1 billion in Singapore, $180 million in Italy, $112 million in Japan and $53 million in other countries.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Geographic Information” and “Item 1A. Risk Factors.”)


Patents and Licenses

In recent years, the Company has been recognized as a leader in volume and quality of patents issued.  As of September 3, 2009, the Company owned approximately 17,300 U.S. patents and 2,900 foreign patents.  In addition, the Company has numerous U.S. and foreign patent applications pending.  The Company’s patents have terms expiring through 2028.

The Company has a number of patent and intellectual property license agreements.  Some of these license agreements require the Company to make one time or periodic payments.  The Company may need to obtain additional patent licenses or renew existing license agreements in the future.  The Company is unable to predict whether these license agreements can be obtained or renewed on acceptable terms.

In recent years, the Company has recovered some of its investment in technology through sales of intellectual property rights to joint venture partners and other third parties.  The Company is pursuing additional opportunities to recover its investment in intellectual property through additional sales of intellectual property and potential partnering arrangements.


Employees

As of September 3, 2009, the Company had approximately 18,200 employees, including approximately 9,300 in the United States, 4,500 in Singapore, 1,900 in Italy, 1,500 in Japan, 800 in China and 200 in the United Kingdom.  The Company’s employees include approximately 1,500 employees in its IM Flash joint ventures that are located in the United States and 2,000 employees in its TECH joint venture that are located in Singapore.  Approximately 500 of the Company’s employees in Italy are represented by labor organizations that have entered into national and local labor contracts with the Company.  The Company’s employment levels can vary depending on market conditions and the level of the Company’s production, research and product and process development.  Many of the Company’s employees are highly skilled, and the Company’s continued success depends in part upon its ability to attract and retain such employees.  The loss of key Company personnel could have a material adverse effect on the Company’s business, results of operations or financial condition.


Environmental Compliance

Government regulations impose various environmental controls on raw materials and discharges, emissions and solid wastes from the Company’s manufacturing processes.  In 2009, the Company’s wholly-owned wafer fabrication facilities continued to conform to the requirements of ISO 14001 certification.  To continue certification, the Company met annual requirements in environmental policy, compliance, planning, management, structure and responsibility, training, communication, document control, operational control, emergency preparedness and response, record keeping and management review.  While the Company has not experienced any materially adverse effects on its operations from environmental regulations, changes in the regulations could necessitate additional capital expenditures, modification of operations or other compliance actions.


Directors and Executive Officers of the Registrant

Officers of the Company are appointed annually by the Board of Directors.  Directors of the Company are elected annually by the shareholders of the Company.  Any directors appointed by the Board of Directors to fill vacancies on the Board serve until the next election by the shareholders.  All officers and directors serve until their successors are duly chosen or elected and qualified, except in the case of earlier death, resignation or removal.

 
8

 

As of September 3, 2009, the following executive officers and directors of the Company were subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended.

Name
Age
Position
 
Mark W. Adams
45
Vice President of Worldwide Sales
Steven R. Appleton
49
Chairman and Chief Executive Officer
Kipp A. Bedard
50
Vice President of Investor Relations
D. Mark Durcan
48
President and Chief Operating Officer
Ronald C. Foster
58
Vice President of Finance and Chief Financial Officer
Roderic W. Lewis
54
Vice President of Legal Affairs, General Counsel and Corporate Secretary
Patrick T. Otte
47
Vice President of Human Resources
Brian J. Shields
48
Vice President of Worldwide Wafer Fabrication
Brian M. Shirley
40
Vice President of Memory
Teruaki Aoki
67
Director
James W. Bagley
70
Director
Robert L. Bailey
52
Director
Mercedes Johnson
55
Director
Lawrence N. Mondry
49
Director
Robert E. Switz
63
Director

Mark W. Adams joined the Company in June 2006.  From January 2006 until he joined the Company, Mr. Adams was the Chief Operating Officer of Lexar Media, Inc.  Mr. Adams served as the Vice President of Sales and Marketing for Creative Labs, Inc. from December 2002 to January 2006.  From March 2000 to September 2002, Mr. Adams was the Chief Executive Officer of Coresma, Inc.  Mr. Adams holds a BA in Economics from Boston College and an MBA from Harvard Business School.

Steven R. Appleton joined the Company in February 1983 and has served in various capacities with the Company and its subsidiaries.  Mr. Appleton first became an officer of the Company in August 1989 and has served in various officer positions with the Company since that time.  From April 1991 until July 1992 and since May 1994, Mr. Appleton has served on the Company’s Board of Directors.  From September 1994 to June 2007, Mr. Appleton served as the Chief Executive Officer, President and Chairman of the Board of Directors of the Company.  In June 2007, Mr. Appleton relinquished his position as President of the Company but retained his positions of Chief Executive Officer and Chairman of the Board.  Mr. Appleton is a member of the Board of Directors of National Semiconductor Corporation.  Mr. Appleton holds a BA in Business Management from Boise State University.

Kipp A. Bedard joined the Company in November 1983 and has served in various capacities with the Company and its subsidiaries.  Mr. Bedard first became an officer of the Company in April 1990 and has served in various officer positions since that time.  Since January 1994, Mr. Bedard has served as Vice President of Investor Relations for the Company.  Mr. Bedard holds a BBA in Accounting from Boise State University.

D. Mark Durcan joined the Company in June 1984 and has served in various technical positions with the Company and its subsidiaries since that time.  Mr. Durcan was appointed Chief Operating Officer in February 2006 and President in June 2007.  Mr. Durcan has been an officer of the Company since 1996.  Mr. Durcan holds a BS and MChE in Chemical Engineering from Rice University.

Ronald C. Foster joined the Company in April 2008 after serving as a member of the Board of Directors from June 2004 to April 2005.  From March 2005 to March 2008, he was the Chief Financial Officer for FormFactor, Inc.  Mr. Foster previously served in senior financial management positions for Hewlett-Packard, Applied Materials, Novell and JDS Uniphase.  Mr. Foster holds a BA in Economics from Whitman College and an MBA from the University of Chicago.

Roderic W. Lewis joined the Company in August 1991 and has served in various capacities with the Company and its subsidiaries.  Mr. Lewis has served as Vice President of Legal Affairs, General Counsel and Corporate Secretary since July 1996.  Mr. Lewis holds a BA in Economics and Asian Studies from Brigham Young University and a JD from Columbia University School of Law.


 
9

 

Patrick T. Otte has served as the Company's Vice President of Human Resources since March 2007.  Mr. Otte joined Micron in 1987 and has served in various positions of increasing responsibility, including Production Manager in several of Micron’s fabrication facilities, Operations Manager for Micron Technology Italia S.r.l. and, Site Director for the Company's facility in Manassas, Virginia. Mr. Otte holds a Bachelor of Science degree from St. Paul Bible College in Minneapolis, Minnesota.

Brian J. Shields joined the Company in November 1986 and has served in various operational positions with the Company.  Mr. Shields first became an officer of the Company in March 2003 and has been Vice President of Wafer Fabrication since December 2005.

Brian M. Shirley joined the Company in August 1992 and has served in various technical positions with the Company.  Mr. Shirley became Vice President of Memory in February 2006.  Mr. Shirley holds a BS in Electrical Engineering from Stanford University.

Teruaki Aoki has served as President of Sony University since April 2005.  Dr. Aoki has been associated with Sony since 1970 and has held various executive positions, including Senior Executive Vice President and Executive Officer of Sony Corporation as well as President and Chief Operating Officer of Sony Electronics, a U.S. subsidiary.  Dr. Aoki holds a Ph.D. in Material Sciences from Northwestern University as well as a BS in Applied Physics from the University of Tokyo.  He was elected as an IEEE Fellow in 2003 and serves as Advisory Board Member of Kellogg School of Management of Northwestern University.  Dr. Aoki also serves on the board of Citizen Holdings Co., Ltd. Dr. Aoki is the Chairman of the Board’s Compensation Committee.

James W. Bagley became the Executive Chairman of Lam Research Corporation (“Lam”), a supplier of semiconductor manufacturing equipment, in June 2005.  From August 1997 through June 2005, Mr. Bagley served as the Chairman and Chief Executive Officer of Lam. Mr. Bagley is a member of the Board of Directors of Teradyne, Inc.  He has served on the Company’s Board of Directors since June 1997.  Mr. Bagley holds a MS and BS in Electrical Engineering from Mississippi State University.

Robert L. Bailey has been Chairman of the Board of Directors of PMC-Sierra (“PMC”) since 2005 and also served as PMC’s Chairman from February 2000 until February 2003.  Mr. Bailey has been a director of PMC since October 1996.  He also served as the President and Chief Executive Officer of PMC from July 1997 until May 2008.  PMC is a leading provider of broadband communication and semiconductor storage solutions for the next-generation Internet.  Mr. Bailey holds a BS degree in Electrical Engineering from the University of Bridgeport and an MBA from the University of Dallas.

Mercedes Johnson was the Senior Vice President and Chief Financial Officer of Avago Technologies Limited, a supplier of analog interface components for communications, industrial and consumer applications, from December 2005 to August 2008.  Prior to that, she served as the Senior Vice President, Finance, of Lam from June 2004 to January 2005 and as Lam’s Chief Financial Officer from May 1997 to May 2004.  Before joining Lam, Ms. Johnson spent 10 years with Applied Materials, Inc., where she served in various senior financial management positions, including Vice President and Worldwide Operations Controller.  Ms. Johnson holds a degree in Accounting from the University of Buenos Aires and currently serves on the Board of Directors for Intersil Corporation.

Lawrence N. Mondry was the President and Chief Executive Officer of CSK Auto Corporation (“CSK”), a specialty retailer of automotive aftermarket parts, from August 2007 to July 2008.  Prior to his appointment at CSK, Mr. Mondry served as the Chief Executive Officer of CompUSA Inc. from November 2003 to May 2006.  Mr. Mondry joined CompUSA in 1990.  Mr. Mondry currently serves on the Board of Directors of CSK. Mr. Mondry is the Chairman of the Board’s Governance Committee and Lead Director.

Robert E. Switz is currently Chairman, President and Chief Executive Officer of ADC Telecommunications, Inc., (“ADC”), a supplier of network infrastructure products and services.  Mr. Switz has been President and Chief Executive officer of ADC since August 2003 and Chairman since August 2008.  He has been with ADC since 1994 and prior to his current position, served ADC as Executive Vice President and Chief Financial Officer.  Mr. Switz holds an MBA from the University of Bridgeport as well as a degree in Marketing/Economics from Quinnipiac University.  Mr. Switz also serves on the Board of Directors for ADC and Broadcom Corporation.  Mr. Switz is the Chairman of the Board’s Audit Committee.

There is no family relationship between any director or executive officer of the Company.

 
10

 

Item 1A.   Risk Factors

In addition to the factors discussed elsewhere in this Form 10-K, the following are important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.

We have experienced dramatic declines in average selling prices for our semiconductor memory products which have adversely affected our business.

For 2009, average selling prices of DRAM and NAND Flash products decreased 52% and 56%, respectively, as compared to 2008.  For 2008, average selling prices of DRAM and NAND Flash products decreased 51% and 67%, respectively, as compared to 2007.  For 2007, average selling prices of DRAM and NAND Flash products decreased 23% and 56%, respectively, as compared to 2006.  In some prior periods, average selling prices for our memory products have been below our manufacturing costs.  If average selling prices for our memory products remain depressed or decrease faster than we can decrease per gigabit costs, as they recently have, our business, results of operations or financial condition could be materially adversely affected.

We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments.

Our cash flows from operations depend primarily on the volume of semiconductor memory sold, average selling prices and per unit manufacturing costs.  To develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and process technology.  We currently estimate our capital spending to be between $750 million and $850 million for 2010.  As of September 3, 2009, we had cash and equivalents and short-term investments totaling $1,485 million, of which $302 million consisted of cash and investments of IM Flash and TECH that would generally not be available to finance our other operations.  In the past we have utilized external sources of financing when needed and access to capital markets has historically been very important to us.  As a result of the severe downturn in the semiconductor memory market, the downturn in general economic conditions, and the adverse conditions in the credit markets, it may be difficult to obtain financing on terms acceptable to us.  We significantly reduced our actual capital expenditures for 2009 and planned capital expenditures for 2010.  In addition, we are considering further financing alternatives, continuing to limit capital expenditures and implementing further cost-cutting initiatives.  There can be no assurance that we will be able to generate sufficient cash flows or find other sources of financing to fund our operations; make adequate capital investments to remain competitive in terms of technology development and cost efficiency; or access capital markets.  Our inability to do the foregoing could have a material adverse effect on our business and results of operations.

We may be unable to reduce our per gigabit manufacturing costs at the rate average selling prices decline.

Our gross margins are dependent upon continuing decreases in per gigabit manufacturing costs achieved through improvements in our manufacturing processes, including reducing the die size of our existing products.  In future periods, we may be unable to reduce our per gigabit manufacturing costs at sufficient levels to improve or maintain gross margins.  Factors that many limit our ability to reduce costs include, but are not limited to, strategic product diversification decisions affecting product mix, the increasing complexity of manufacturing processes, changes in process technologies or products that inherently may require relatively larger die sizes.  Per gigabit manufacturing costs may also be affected by the relatively smaller production quantities and shorter product lifecycles of certain specialty memory products.

Consolidation of industry participants and governmental assistance to some of our competitors may contribute to uncertainty in the semiconductor market and negatively impact our ability to compete.

In recent periods manufacturing supply has significantly exceeded customer demand resulting in significant declines in average selling prices of DRAM and NAND Flash products and substantial operating losses by the Company and its competitors.  The operating losses as well as limited access to sources of financing have led to the deterioration in the financial condition of a number of industry participants.  Some of our competitors may try to enhance their capacity and lower their cost structure through consolidation.  Consolidation of industry competitors could put us at a competitive disadvantage.  In addition, some governments have provided, or are considering, significant financial assistance for some of our competitors.

 
11

 

The recent economic downturn in the worldwide economy and the semiconductor industry may harm our business.

The downturn in the worldwide economy, including a continuing downturn in the semiconductor memory industry, had an adverse effect on our business.  Adverse economic conditions affect consumer demand for devices that incorporate our products, such as personal computers, mobile phones, Flash memory cards and USB devices.  Reduced demand for our products could result in continued market oversupply and significant decreases in our average selling prices.  A continuation of current negative conditions in worldwide credit markets would limit our ability to obtain external financing to fund our operations and capital expenditures.  In addition, we may experience losses on our holdings of cash and investments due to failures of financial institutions and other parties.  Difficult economic conditions may also result in a higher rate of losses on our accounts receivables due to credit defaults.  As a result, our business, results of operations or financial condition could be materially adversely affected.

The semiconductor memory industry is highly competitive.

We face intense competition in the semiconductor memory market from a number of companies, including Elpida Memory, Inc.; Hynix Semiconductor Inc.; Samsung Electronics Co., Ltd.; SanDisk Corporation; and Toshiba Corporation.  Some of our competitors are large corporations or conglomerates that may have greater resources or greater access to resources, including governmental resources, to withstand downturns in the semiconductor markets in which we compete, invest in technology and capitalize on growth opportunities.  Our competitors seek to increase silicon capacity, improve yields, reduce die size and minimize mask levels in their product designs.  The transitions to smaller line-width process technologies and 300mm wafers in the industry have resulted in significant increases in the worldwide supply of semiconductor memory.  Increases in worldwide supply of semiconductor memory also result from semiconductor memory fab capacity expansions, either by way of new facilities, increased capacity utilization or reallocation of other semiconductor production to semiconductor memory production.   Increases in worldwide supply of semiconductor memory, if not accompanied with commensurate increases in demand, would lead to further declines in average selling prices for our products and would materially adversely affect our business, results of operations or financial condition.

Our joint ventures and strategic partnerships involve numerous risks.

We have entered into partnering arrangements to manufacture products and develop new manufacturing process technologies and products.  These arrangements include our IM Flash NAND Flash joint ventures with Intel, our Inotera DRAM joint venture with Nanya, our TECH DRAM joint venture, our MP Mask joint venture with Photronics and our CMOS image sensor wafer supply agreement with Aptina .   These joint ventures and strategic partnerships are subject to various risks that could adversely affect the value of our investments and our results of operations.  These risks include the following:

·  
our interests could diverge from our partners in the future or we may not be able to agree with partners on ongoing manufacturing and operational activities, or on the amount, timing or nature of further investments in our joint venture;

·  
recognition of our share of potential Inotera and Aptina losses in our results of operation;

·  
due to financial constraints, our partners may be unable to meet their commitments to us or our joint ventures and may pose credit risks for our transactions with them;

·  
the terms of our arrangements may turn out to be unfavorable;

·  
cash flows may be inadequate to fund increased capital requirements;

·  
we may experience difficulties in transferring technology to joint ventures;

·  
we may experience difficulties and delays in ramping production at joint ventures;

·  
these operations may be less cost-efficient as a result of underutilized capacity; and

·  
political or economic instability may occur in the countries where our joint ventures and/or partners are located.

If our joint ventures and strategic partnerships are unsuccessful, our business, results of operations or financial condition may be adversely affected.

 
12

 

Our ownership interest in Inotera Memories, Inc. involves numerous risks.

In the first quarter of 2009, we acquired a 35.5% ownership interest in Inotera Memories, Inc., a publicly traded Taiwanese DRAM memory manufacturer, from Qimonda, AG.  In August 2009, our ownership interest in Inotera was reduced to 29.8% as a result of Inotera’s issuance of common stock in a public offering for approximately $310 million.  In connection with our interest in Inotera, we also have rights and obligations to purchase up to 50% of the wafer production of Inotera.  Our acquisition of an interest in Inotera involves numerous risks including the following:

·  
Inotera’s ability to meet its ongoing obligations;

·  
costs associated with manufacturing inefficiencies resulting from underutilized capacity;

·  
difficulties in converting Inotera production from Qimonda’s trench technology to our stack technology;

·  
difficulties in obtaining financing for capital expenditures necessary to convert Inotera production to our stack technology;

·  
increasing our debt to finance the acquisition of Inotera shares;

·  
uncertainties around the timing and amount of wafer supply we will receive under the supply agreement;
 
·  
risks relating to actions that may be taken or initiated by Qimonda’s bankruptcy administrator relating to Qimonda’s transfer to the Company of its Inotera shares and to the possible rejection of or failure to perform under certain patent and technology license agreements between the Company and Qimonda;
 
·  
obligations during the technology transition period to procure product based on a competitor’s technology which may be difficult to sell and to provide support for such product, with respect to which we have limited technological understanding; and

·  
the effect on our margins associated with our obligation to purchase product utilizing Qimonda’s trench technology at a relatively higher cost than other products manufactured by us and selling them potentially at a lower price than other products produced by us.

Pursuant to our obligations under a supply agreement with Inotera, we recorded $95 million of charges in cost of goods sold in 2009 related to underutilized capacity and purchased $46 million of trench DRAM products from Inotera.

We may incur additional restructure charges in future periods.

In response to a severe downturn in the semiconductor memory industry and global economic conditions, we implemented restructure initiatives in 2009, 2008 and 2007 that resulted in net charges of $70 million, $33 million and $19 million, respectively.  The restructure initiatives included shutting down our 200mm wafer fabrication facility in Boise, suspending the production ramp of a new fabrication facility in Singapore and other personnel cost reductions.  Depending on market conditions, in future periods we may implement further restructure initiatives.  As a result of these initiatives, we could incur restructure charges, lose production output, lose key personnel and experience disruptions in our operations and difficulties in delivering products timely.


 
13

 

An adverse determination that our products or manufacturing processes infringe the intellectual property rights of others could materially adversely affect our business, results of operations or financial condition.

On January 13, 2006, Rambus, Inc. (“Rambus”) filed a lawsuit against us in the U.S. District Court for the Northern District of California. Rambus alleges that certain of our DDR2, DDR3, RLDRAM, and RLDRAM II products infringe as many as fourteen Rambus patents and seeks monetary damages, treble damages, and injunctive relief. The accused products account for a significant portion of our net sales. On June 2, 2006, we filed an answer and counterclaim against Rambus alleging, among other things, antitrust and fraud claims.  On January 9, 2009, in another lawsuit involving the Company and Rambus and involving allegations by Rambus of patent infringement against us in the U.S. District Court for the District of Delaware, Judge Robinson entered an opinion in favor of us holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company.  Rambus subsequently appealed the Delaware Court’s decision to the U.S. Court of Appeals for the Federal Circuit.  Subsequently, the Northern District of California Court stayed a trial of on the patent phase of the Northern District of California case pending the outcome of the appeal of the Delaware Court’s spoliation decision or further order of the California Court.  (See “Item 3. Legal Proceedings” for additional details on this lawsuit and other Rambus matters pending in the U.S. and Europe.)

On March 6, 2009, Panavision Imaging LLC filed suit against the Company and Aptina Imaging Corporation, then a wholly-owned subsidiary of the Company, in the U.S. District Court for the Central District of California.  The complaint alleges that certain of the Company and Aptina’s image sensor products infringe four Panavision Imaging U.S. patents and seeks injunctive relief, damages, attorneys’ fees, and costs.

On March 24, 2009, Accolade Systems LLC filed suit against the Company and Aptina in the U.S. District Court for the Eastern District of Texas alleging that certain of the Company and Aptina’s image sensor products infringe one Accolade Systems U.S. patent.  The complaint seeks injunctive relief, damages, attorneys’ fees, and costs.  Accolade Systems never served the complaint, and on October 15, 2009, filed a motion to dismiss the complaint against the Company and Aptina without prejudice.

We are unable to predict the outcome of assertions of infringement made against us.  A court determination that our products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes.  Any of the foregoing results could have a material adverse effect on our business, results of operations or financial condition.

We have a number of patent and intellectual property license agreements.  Some of these license agreements require us to make one time or periodic payments.  We may need to obtain additional patent licenses or renew existing license agreements in the future.  We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.

An adverse outcome relating to allegations of anticompetitive conduct could materially adversely affect our business, results of operations or financial condition.

A number of purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers.  Numerous cases have been filed in various state and federal courts asserting claims on behalf of a purported class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM from various DRAM suppliers during the time period from April 1, 1999 through at least June 30, 2002.  The complaints allege violations of the various jurisdictions’ antitrust, consumer protection and/or unfair competition laws relating to the sale and pricing of DRAM products and seek joint and several damages, trebled, restitution, costs, interest and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated pre-trial proceedings.  On January 29, 2008, the Northern District of California Court granted in part and denied in part our motion to dismiss the plaintiff’s second amended consolidated complaint.  The District Court subsequently certified the decision for interlocutory appeal.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit agreed to consider plaintiffs’ interlocutory appeal.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

Various states, through their Attorneys General, have filed suit against us and other DRAM manufacturers alleging violations of state and federal competition laws.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks damages, and 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.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)
 
14

Three purported class action lawsuits alleging price-fixing of Flash products have been filed against us in Canada asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

On May 5, 2004, Rambus filed a lawsuit in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers.  The complaint alleges various causes of action under California state law including conspiracy to restrict output and fix prices of Rambus DRAM ("RDRAM"), and unfair competition.  The complaint seeks joint and several damages, trebled, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaint.  Trial is currently scheduled to begin in January 2010.  (See “Item 3.  Legal Proceedings” for additional details on this case and other Rambus matters pending in the U.S. and Europe.)

We are unable to predict the outcome of these lawsuits.  An adverse court determination in any of these lawsuits alleging 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.

An adverse outcome relating to allegations of violations of securities laws could materially adversely affect our business, results of operations or financial condition.

On February 24, 2006, a number of purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  The cases purport to be brought on behalf of a class of purchasers of our stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct.  The complaint seeks unspecified damages, interest, attorneys' fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of our stock during the period from February 24, 2001 to September 18, 2002.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

We are unable to predict the outcome of these cases.  An adverse court determination in any of the class action lawsuits against us could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Our debt level is higher than compared to historical periods.

We currently have a higher level of debt compared to historical periods.  As of September 3, 2009 we had $3.1 billion of debt. We may need to incur additional debt in the future. Our debt level could adversely impact us.  For example it could:

·  
make it more difficult for us to make payments on our debt;

·  
require us to dedicate a substantial portion of our cash flow from operations and other capital resources to debt service;

·  
limit our future ability to raise funds for capital expenditures, acquisitions, research and development and other general corporate requirements;

·  
increase our vulnerability to adverse economic and semiconductor memory industry conditions;

·  
expose us to fluctuations in interest rates with respect to that portion of our debt which is at a variable rate of interest; and

·  
require us to make additional investments in joint ventures to maintain compliance with financial covenants.

Several of our credit facilities, one of which was modified during 2009, have covenants which require us to maintain minimum levels of tangible net worth and cash and investments.  As of September 3, 2009, we were in compliance with our debt covenants.  If we are unable to continue to be in compliance with our debt covenants, or obtain waivers, an event of default could be triggered, which, if not cured, could cause the maturity of other borrowings to be accelerated and become due and currently payable.

15

Covenants in our debt instruments may obligate us to repay debt, increase contributions to our TECH joint venture and limit our ability to obtain financing.

Our ability to comply with the financial and other covenants contained in our debt may be affected by economic or business conditions or other events.  As of September 3, 2009, our 85% owned TECH Semiconductor Singapore Pte. Ltd., (“TECH”) subsidiary, had $548 million outstanding under a credit facility with covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios for TECH and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets.  If TECH does not comply with these debt covenants and restrictions, this debt may be deemed to be in default and the debt declared payable.  There can be no assurance that TECH will be able to comply with its covenants.  Additionally, if TECH is unable to repay its borrowings when due, the lenders under TECH’s credit facility could proceed against substantially all of TECH’s assets.  In the first quarter of 2010, TECH modified its debt covenants.  In connection with the modification, our guarantee of TECH’s debt increased from approximately 73% to approximately 85% of the outstanding amount borrowed under TECH’s credit facility.  Our guarantee could increase up to 100% of the outstanding amount borrowed under the facility based on further increases in our ownership interest in TECH and other conditions.  If TECH’s debt is accelerated, we may not have sufficient assets to repay amounts due.  Existing covenant restrictions may limit our ability to obtain additional debt financing.  To avoid covenant defaults we may be required to repay debt obligations and/or make additional contributions to TECH, all of which could adversely affect our liquidity and financial condition.

We expect to make future acquisitions and alliances, which involve numerous risks.

Acquisitions and the formation of alliances, such as joint ventures and other partnering arrangements, involve numerous risks including the following:

·  
difficulties in integrating the operations, technologies and products of acquired or newly formed entities;

·  
increasing capital expenditures to upgrade and maintain facilities;

·  
increasing debt to finance any acquisition or formation of a new business;

·  
difficulties in protecting our intellectual property as we enter into a greater number of licensing arrangements;

·  
diverting management’s attention from normal daily operations;

·  
managing larger or more complex operations and facilities and employees in separate geographic areas; and

·  
hiring and retaining key employees.

Acquisitions of, or alliances with, high-technology companies are inherently risky, and any future transactions may not be successful and may materially adversely affect our business, results of operations or financial condition.

New product development may be unsuccessful.

We are developing new products that complement our traditional memory products or leverage their underlying design or process technology.  We have made significant investments in product and process technologies and anticipate expending significant resources for new semiconductor product development over the next several years.  The process to develop DRAM, NAND Flash and certain specialty memory products requires us to demonstrate advanced functionality and performance, many times well in advance of a planned ramp of production, in order to secure design wins with our customers.  There can be no assurance that our product development efforts will be successful, that we will be able to cost-effectively manufacture new products, that we will be able to successfully market these products or that margins generated from sales of these products will recover costs of development efforts.

The future success of our Imaging foundry business is dependent on Aptina’s market success and customer demand.

In recent quarters, Aptina’s net sales and gross margins decreased due to declining demand and increased competition.  There can be no assurance that Aptina will be able to grow or maintain its market share or gross margins.  Any reduction in Aptina’s market share could adversely affect the operating results of our Imaging foundry business.  Aptina’s success depends on a number of factors, including:

16

·  
development of products that maintain a technological advantage over the products of our competitors;

·  
accurate prediction of market requirements and evolving standards, including pixel resolution, output interface standards, power requirements, optical lens size, input standards and other requirements;

·  
timely completion and introduction of new imaging products that satisfy customer requirements; and

·  
timely achievement of design wins with prospective customers, as manufacturers may be reluctant to change their source of components due to the significant costs, time, effort and risk associated with qualifying a new supplier.

Depressed pricing for semiconductor memory products may lead to future losses and inventory write-downs.

As a result of the significant decreases in average selling prices for our semiconductor memory products, we recorded charges of $603 million in aggregate for 2009, $282 million in aggregate for 2008 and $20 million in 2007 to write down inventories to their estimated market value.  Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded.  For example, a 5% variance in the estimated selling prices would have changed the estimated market value of our semiconductor memory inventory by approximately $75 million at September 3, 2009.  If the estimated market values of products held in finished goods and work in process inventories at a quarter-end date are below the manufacturing cost of these products, we will recognize charges to cost of goods sold to write down the carrying value of our inventories to market value.

The inability to reach an acceptable agreement with our TECH joint venture partners regarding the future of TECH after its shareholders’ agreement expires in April 2011 could have a significant adverse effect on our DRAM production and results of operation.

Since 1998, we have participated in TECH, a semiconductor memory manufacturing joint venture in Singapore among the Company, Canon Inc. (“Canon”) and Hewlett-Packard Company (“HP”).  As of September 3, 2009, the ownership of TECH was held approximately 85% by us, approximately 11% by Canon and approximately 4% by HP.  The financial results of TECH are included in our consolidated financial statements.  In 2009, TECH accounted for 20% of our total DRAM gigabit production.  The shareholders’ agreement for TECH expires in April 2011.  In the first quarter of 2010, TECH received a notice from HP that it does not intend to extend the TECH joint venture beyond April 2011.  We are working with HP and Canon to reach a resolution of the matter.  The parties’ inability to reach a resolution of this matter prior to April 2011 could result in the dissolution of TECH and have a significant adverse impact on our DRAM production and results of operation.

Products that fail to meet specifications, are defective or that are otherwise incompatible with end uses could impose significant costs on us.

Products that do not meet specifications or that contain, or are perceived by our customers to contain, defects or that are otherwise incompatible with end uses could impose significant costs on us or otherwise materially adversely affect our business, results of operations or financial condition.

Because the design and production process for semiconductor memory is highly complex, it is possible that we may produce products that do not comply with customer specifications, contain defects or are otherwise incompatible with end uses.  If, despite design review, quality control and product qualification procedures, problems with nonconforming, defective or incompatible products occur after we have shipped such products, we could be adversely affected in several ways, including the following:

·  
we may be required to replace product or otherwise compensate customers for costs incurred or damages caused by defective or incompatible product, and

·  
we may encounter adverse publicity, which could cause a decrease in sales of our products.


 
17

 

Changes in foreign currency exchange rates could materially adversely affect our business, results of operations or financial condition.

Our financial statements are prepared in accordance with U.S. GAAP and are reported in U.S. dollars.  Across our multi-national operations, there are transactions and balances denominated in other currencies, primarily the Singapore dollar, euro and yen.  We recorded net losses from changes in currency exchange rates of $30 million for 2009 and of $25 million for 2008.  We estimate that, based on its assets and liabilities denominated in currencies other than the U.S. dollar as of September 3, 2009, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately U.S. $3 million for the Singapore dollar and $1 million for the euro and yen.  In the event that the U.S. dollar weakens significantly compared to the Singapore dollar, euro and yen, our results of operations or financial condition will be adversely affected.

We face risks associated with our international sales and operations that could materially adversely affect our business, results of operations or financial condition.

Sales to customers outside the United States approximated 81% of our consolidated net sales for 2009.  In addition, we have manufacturing operations in China, Italy, Japan, Puerto Rico and Singapore.  Our international sales and operations are subject to a variety of risks, including:

·  
currency exchange rate fluctuations;

·  
export and import duties, changes to import and export regulations, and restrictions on the transfer of funds;

·  
political and economic instability;

·  
problems with the transportation or delivery of our products;

·  
issues arising from cultural or language differences and labor unrest;

·  
longer payment cycles and greater difficulty in collecting accounts receivable;

·  
compliance with trade, technical standards and other laws in a variety of jurisdictions;

·  
changes in economic policies of foreign governments; and

·  
difficulties in staffing and managing international operations.

These factors may materially adversely affect our business, results of operations or financial condition.

Our net operating loss and tax credit carryforwards may be limited.

We have a valuation allowance against substantially all of our U.S. net deferred tax assets.  As of September 3, 2009, we had aggregate U.S. tax net operating loss carryforwards of $4.2 billion and unused U.S. tax credit carryforwards of $212 million.  We also had unused state tax net operating loss carryforwards of $2.6 billion and unused state tax credits of $198 million.  Substantially all of the net operating loss carryforwards expire in 2022 to 2029 and substantially all of the tax credit carryforwards expire in 2013 to 2029.  Utilization of these net operating losses and credit carryforwards is dependent upon us achieving sustained profitability.  As a consequence of prior business acquisitions, utilization of the tax benefits for some of the tax carryforwards is subject to limitations imposed by Section 382 of the Internal Revenue Code and some portion or all of these carryforwards may not be available to offset any future taxable income.  The determination of the limitations is complex and requires significant judgment and analysis of past transactions.


 
18

 

If our manufacturing process is disrupted, our business, results of operations or financial condition could be materially adversely affected.

We manufacture products using highly complex processes that require technologically advanced equipment and continuous modification to improve yields and performance.  Difficulties in the manufacturing process or the effects from a shift in product mix can reduce yields or disrupt production and may increase our per gigabit manufacturing costs.  Additionally, our control over operations at our IM Flash, TECH, Inotera and MP Mask joint ventures may be limited by our agreements with our partners.  From time to time, we have experienced minor disruptions in our manufacturing process as a result of power outages, improperly functioning equipment and equipment failures.  If production at a fabrication facility is disrupted for any reason, manufacturing yields may be adversely affected or we may be unable to meet our customers' requirements and they may purchase products from other suppliers.  This could result in a significant increase in manufacturing costs or loss of revenues or damage to customer relationships, which could materially adversely affect our business, results of operations or financial condition.

Disruptions in our supply of raw materials could materially adversely affect our business, results of operations or financial condition.

Our operations require raw materials that meet exacting standards.  We generally have multiple sources of supply for our raw materials.  However, only a limited number of suppliers are capable of delivering certain raw materials that meet our standards.  Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases, lead frames and molding compound.  Shortages may occur from time to time in the future.  In addition, disruptions in transportation lines could delay our receipt of raw materials.  Lead times for the supply of raw materials have been extended in the past.  If our supply of raw materials is disrupted or our lead times extended, our business, results of operations or financial condition could be materially adversely affected.



 
19

 

Item 1B.   Unresolved Staff Comments

None.


Item 2.   Properties

The Company’s corporate headquarters are located in Boise, Idaho.  The following is a summary of the principal facilities owned by the Company:

Location
Principal Operations
   
Boise, Idaho
R&D including wafer fabrication and reticle manufacturing
Lehi, Utah
Wafer fabrication
Manassas, Virginia
Wafer fabrication
Singapore
Two wafer fabrication facilities and a test, assembly and module assembly facility
Nishiwaki City, Japan
Wafer fabrication
Avezzano, Italy
Wafer fabrication
Nampa, Idaho
Test
Aguadilla, Puerto Rico
Module assembly and test
Xi’an, China
Test

The Company also owns and leases a number of other facilities in locations throughout the world that are used for design, research and development, and sales and marketing activities.  The Company’s facility in Lehi is owned and operated by its IM Flash joint venture with Intel.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Consolidated Variable Interest Entities – NAND Flash Joint Ventures with Intel.”)  One of the Company’s wafer fabrication facilities in Singapore is owned by its TECH joint venture and collateralizes, in part, TECH’s $548 million credit facility.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – TECH Semiconductor Singapore Pte. Ltd.”)  The Company’s other wafer fabrication facility in Singapore is owned by its IM Flash Singapore joint venture.  The IM Flash Singapore facility was substantially completed in the first quarter of 2009 but has not been equipped.  In October 2008, the Company and Intel agreed to suspend tooling and the ramp of production at IM Flash’s Singapore wafer fabrication plant.  Utilization of the facility is dependent on market conditions.

In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera.  As a result of this acquisition, the Company has rights and obligations to purchase up to 50% of the wafer production of Inotera.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments – DRAM joint ventures with Nanya .”)

The Company believes that its existing facilities are suitable and adequate for its present purposes.  The Company does not identify or allocate assets by operating segment.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Geographic Information.”)



 
20

 

Item 3. Legal Proceedings

Patent Matters

On August 28, 2000, the Company filed a complaint against Rambus, Inc. (“Rambus”) in the U.S. District Court for the District of Delaware seeking monetary damages and declaratory and injunctive relief.  Among other things, the Company’s complaint (as amended) alleges violation of federal antitrust laws, breach of contract, fraud, deceptive trade practices, and negligent misrepresentation.  The complaint also seeks a declaratory judgment (a) that certain Rambus patents are not infringed by the Company, are invalid, and/or are unenforceable, (b) that the Company has an implied license to those patents, and (c) that Rambus is estopped from enforcing those patents against the Company.  On February 15, 2001, Rambus filed an answer and counterclaim in Delaware denying that the Company is entitled to relief, alleging infringement of the eight Rambus patents (later amended to add four additional patents) named in the Company’s declaratory judgment claim, and seeking monetary damages and injunctive relief.  In the Delaware action, the Company subsequently added claims and defenses based on Rambus’s alleged spoliation of evidence and litigation misconduct.  The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007.  On January 9, 2009, Judge Robinson entered an opinion in favor of the Company holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company.  Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit.  That appeal is pending.

A number of other suits involving Rambus are currently pending in Europe alleging that certain of the Company’s SDRAM and DDR SDRAM products infringe various of Rambus’ country counterparts to its European patent 525 068, including: on September 1, 2000, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany; on September 22, 2000, Rambus filed a complaint against the Company and Reptronic (a distributor of the Company’s products) in the Court of First Instance of Paris, France; on September 29, 2000, the Company filed suit against Rambus in the Civil Court of Milan, Italy, alleging invalidity and non-infringement.  In addition, on December 29, 2000, the Company filed suit against Rambus in the Civil Court of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patent 1 004 956.  Additionally, on August 14, 2001, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany alleging that certain of the Company’s DDR SDRAM products infringe Rambus’ country counterparts to its European patent 1 022 642.  In the European suits against the Company, Rambus is seeking monetary damages and injunctive relief.  Subsequent to the filing of the various European suits, the European Patent Office (the “EPO”) declared Rambus’ 525 068 and 1 004 956 European patents invalid and revoked the patents.  The declaration of invalidity with respect to the ‘068 patent was upheld on appeal.  The original claims of the '956 patent also were declared invalid on appeal, but the EPO ultimately granted a Rambus request to amend the claims by adding a number of limitations.

On January 13, 2006, Rambus, Inc. (“Rambus”) filed a lawsuit against the Company in the U.S. District Court for the Northern District of California. Rambus alleges that certain of the Company’s DDR2, DDR3, RLDRAM, and RLDRAM II products infringe as many as fourteen Rambus patents and seeks monetary damages, treble damages, and injunctive relief. The accused products account for a significant portion of the Company's net sales. On June 2, 2006, the Company filed an answer and counterclaim against Rambus alleging, among other things, antitrust and fraud claims.  On January 9, 2009, in another lawsuit involving the Company and Rambus and involving allegations by Rambus of patent infringement against the Company in the U.S. District Court for the District of Delaware, Judge Robinson entered an opinion in favor of the Company holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company.  Rambus subsequently appealed the Delaware Court’s decision to the U.S. Court of Appeals for the Federal Circuit.  Subsequently, the Northern District of California Court stayed a trial of the patent phase of the Northern District of California case pending the outcome of the appeal of the Delaware Court’s spoliation decision or further order of the California Court.

On March 6, 2009, Panavision Imaging, LLC filed suit against the Company and Aptina Imaging Corporation, then a wholly-owned subsidiary of the Company (“Aptina”), in the U.S. District Court for the Central District of California.  The complaint alleges that certain of the Company and Aptina’s image sensor products infringe four Panavision Imaging U.S. patents and seeks injunctive relief, damages, attorneys’ fees, and costs.

On March 24, 2009, Accolade Systems LLC filed suit against the Company and Aptina in the U.S. District Court for the Eastern District of Texas alleging that certain of the Company and Aptina’s image sensor products infringe one Accolade Systems U.S. patent.  The complaint seeks injunctive relief, damages, attorneys’ fees, and costs.  Accolade Systems never served the complaint, and on October 15, 2009, filed a motion to dismiss the complaint against the Company and Aptina without prejudice.

21

The Company is unable to predict the outcome of these suits.  A court determination that the Company’s products or manufacturing processes infringe the product or process intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes.  Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition.

Antitrust Matters

A number of purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers.  Four cases have been filed in the U.S. District Court for the Northern District of California asserting claims on behalf of a purported class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM from various DRAM suppliers during the time period from April 1, 1999 through at least June 30, 2002.  The complaints allege price fixing in violation of federal antitrust laws and various state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.  In addition, at least sixty-four cases have been filed in various state courts asserting claims on behalf of a purported class of indirect purchasers of DRAM.  Cases have been filed in the following states:  Arkansas, Arizona, California, Florida, Hawaii, Iowa, Kansas, Massachusetts, Maine, Michigan, Minnesota, Mississippi, Montana, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio, Pennsylvania, South Dakota, Tennessee, Utah, Vermont, Virginia, Wisconsin, and West Virginia, and also in the District of Columbia and Puerto Rico.  The complaints purport to be on behalf of a class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM in the respective jurisdictions during various time periods ranging from April 1999 through at least June 2002.  The complaints allege violations of the various jurisdictions’ antitrust, consumer protection and/or unfair competition laws relating to the sale and pricing of DRAM products and seek joint and several damages, trebled, as well as restitution, costs, interest and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated pre-trial proceedings.  On January 29, 2008, the Northern District of California Court granted in part and denied in part the Company’s motion to dismiss plaintiff’s second amended consolidated complaint.  Plaintiffs subsequently filed a motion seeking certification for interlocutory appeal of the decision.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit agreed to consider plaintiffs’ interlocutory appeal.

Additionally, three cases have been filed against the Company in the following Canadian courts:  Superior Court, District of Montreal, Province of Quebec; Ontario Superior Court of Justice, Ontario; and Supreme Court of British Columbia, Vancouver Registry, British Columbia.  The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States.  Plaintiffs’ motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively.  Plaintiffs have filed an appeal of each of those decisions.  Those appeals are pending.

In addition, various states, through their Attorneys General, have filed suit against the Company and other DRAM manufacturers.  On July 14, 2006, and on September 8, 2006 in an amended complaint, the following Attorneys General filed suit in the U.S. District Court for the Northern District of California:  Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.  Thereafter, three states, Ohio, New Hampshire, and Texas, voluntarily dismissed their claims.  The remaining states filed a third amended complaint on October 1, 2007.  Alaska, Delaware, Kentucky, and Vermont subsequently voluntarily dismissed their claims.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks joint and several damages, trebled, as well as injunctive and other relief.  Additionally, on July 13, 2006, the State of New York filed a similar suit in the U.S. District Court for the Southern District of New York.  That case was subsequently transferred to the U.S. District Court for the Northern District of California for pre-trial purposes.  The State of New York filed an amended complaint on October 1, 2007.  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 February 28, 2007, February 28, 2007 and March 8, 2007, cases were filed against the Company and other manufacturers of DRAM in the U.S. District Court for the Northern District of California by All American Semiconductor, Inc., Jaco Electronics, Inc. and DRAM Claims Liquidation Trust, respectively, that opted-out of a direct purchaser class action suit that was settled.  The complaints allege, among other things, violations of federal and state antitrust and competition laws in the DRAM industry, and seek joint and several damages, trebled, as well as restitution, attorneys’ fees, costs, and injunctive relief.

22

Three purported class action lawsuits alleging price-fixing of “Static Random Access Memory” or “SRAM” products  have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased SRAM products directly or indirectly from various SRAM suppliers.

In addition, three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers.  The complaint alleges various causes of action under California state law including a conspiracy to restrict output and fix prices of Rambus DRAM (“RDRAM”) and unfair competition.  Trial is currently scheduled to begin in January 2010.  The complaint seeks joint and several damages, trebled, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaint.

The Company is unable to predict the outcome of these lawsuits.  The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

Securities Matters

On February 24, 2006, a putative class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  Four substantially similar complaints subsequently were filed in the same Court.  The cases purport to be brought on behalf of a class of purchasers of the Company’s stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct or the Company’s operations and financial results.  The complaint seeks unspecified damages, interest, attorneys’ fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of the Company’s stock during the period from February 24, 2001 to September 18, 2002.

In addition, on March 23, 2006, a shareholder derivative action was filed in the Fourth District Court for the State of Idaho (Ada County), allegedly on behalf of and for the benefit of the Company, against certain of the Company’s current and former officers and directors.  The Company also was named as a nominal defendant.  An amended complaint was filed on August 23, 2006 and was subsequently dismissed by the Court.  Another amended complaint was filed on September 6, 2007.  The amended complaint was based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the District of Idaho and alleged breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and insider trading.  The amended complaint sought unspecified damages, restitution, disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses.  The amended complaint was derivative in nature and did not seek monetary damages from the Company.  On January 25, 2008, the Court granted the Company’s motion to dismiss the second amended complaint without leave to amend.  On March 10, 2008, plaintiffs filed a notice of appeal to the Idaho Supreme Court.  On July 16, 2009, the Idaho Supreme Court issued an opinion upholding the lower court’s dismissal of the complaint.

The Company is unable to predict the outcome of these cases.  A court determination in any of these actions against the Company could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

(See “Item 1A. Risk Factors.”)


Item 4.   Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of 2008.

 
23

 


PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

The Company’s common stock is listed on the New York Stock Exchange and is traded under the symbol “MU.”  The following table represents the high and low closing sales prices for the Company’s common stock for each quarter of 2009 and 2008, as reported by Bloomberg L.P.


   
High
   
Low
 
             
2009:
           
4th quarter
  $ 7.56     $ 4.70  
3rd quarter
    5.50       2.58  
2nd quarter
    4.32       1.85  
1st quarter
    5.13       1.69  
2008:
               
4th quarter
  $ 8.53     $ 4.24  
3rd quarter
    8.84       5.46  
2nd quarter
    9.26       5.75  
1st quarter
    11.79       7.94  

Holders of Record

As of October 20, 2009, there were 3,147 shareholders of record of the Company’s common stock.

Dividends

The Company has not declared or paid cash dividends since 1996 and does not intend to pay cash dividends on its common stock for the foreseeable future.

Equity Compensation Plan Information

The information required by this item is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.

Issuer Sales of Unregistered Securities

On August 11, 2009, the Company issued 1.8 million unregistered shares of common stock to DT FLCO, Inc. as noncash consideration of $12 million paid for a business acquired for cash and stock.  These shares were exempt from registration under Section 4(2) of the Securities Act of 1933.

Issuer Purchases of Equity Securities

During the fourth quarter of 2009, the Company acquired, as payment of withholding taxes in connection with the vesting of restricted stock and restricted stock unit awards, 26,177 shares of its common stock at an average price of $6.12 per share.  In the fourth quarter of 2009, the Company retired the 26,177 shares acquired in the fourth quarter of 2009.

 
24

 


Period
 
(a) Total number of shares purchased
   
(b) Average price paid per share
   
(c) Total number of shares (or units) purchased as part of publicly announced plans or programs
   
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
 
                         
June 5, 2009          –      July 9, 2009
    14,622     $ 5.43       N/A       N/A  
July 10, 2009         –      August 6, 2009
    939       5.21       N/A       N/A  
August 7, 2009     –      September 3, 2009
    10,616       7.15       N/A       N/A  
      26,177       6.12                  


Performance Graph

The following graph illustrates a five-year comparison of cumulative total returns for the Company’s Common Stock, the S&P 500 Composite Index and the Philadelphia Semiconductor Index (SOX) from August 31, 2004, through August 31, 2009.

Note:  Management cautions that the stock price performance information shown in the graph below is provided as of fiscal year-end and may not be indicative of current stock price levels or future stock price performance.

STOCK GRAPH

The Company operates on a 52 or 53 week fiscal year which ends on the Thursday closest to August 31.  Accordingly, the last day of the Company’s fiscal year varies.  For consistent presentation and comparison to the industry indices shown herein, the Company has calculated its stock performance graph assuming an August 31 year end.  The performance graph assumes $100 invested on August 31, 2004 in Common Stock of Micron Technology, Inc., the S&P 500 Composite Index and the Philadelphia Semiconductor Index (SOX).  Any dividends paid during the period presented are assumed to be reinvested.  The performance was plotted using the following data:

Performance Graph Data

   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
                                     
Micron Technology, Inc.
  $ 100     $ 103     $ 150     $ 99     $ 37     $ 64  
S&P 500 Composite Index
    100       113       123       141       125       102  
Philadelphia Semiconductor Index (SOX)
    100       128       122       137       98       87  


 
25

 

Item 6.   Selected Financial Data

   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(in millions)
 
                               
Net sales
  $ 4,803     $ 5,841     $ 5,688     $ 5,272     $ 4,880  
Gross margin
    (439 )     (55 )     1,078       1,200       1,146  
Operating income (loss)
    (1,675 )     (1,595 )     (280 )     350       217  
Net income (loss)
    (1,835 )     (1,619 )     (320 )     408       188  
Diluted earnings (loss) per share
    (2.29 )     (2.10 )     (0.42 )     0.57       0.29  
                                         
Cash and short-term investments
    1,485       1,362       2,616       3,079       1,290  
Total current assets
    3,344       3,779       5,234       5,101       2,926  
Property, plant and equipment, net
    7,081       8,811       8,279       5,888       4,684  
Total assets
    11,455       13,430       14,818       12,221       8,006  
Total current liabilities
    1,892       1,598       2,026       1,661       979  
Long-term debt
    2,674       2,451       1,987       405       1,020  
Noncontrolling interests in subsidiaries
    1,986       2,865       2,607       1,568       --  
Total shareholders’ equity
    4,654       6,178       7,752       8,114       5,847  

In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera Memories, Inc. (“Inotera”), a publicly-traded DRAM manufacturer in Taiwan.  In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera pursuant to which Inotera sells trench and stack DRAM products to the Company and the Company’s DRAM joint venture partner, Nanya Technology Corporation.  On August 3, 2009, Inotera issued shares in a public offering, decreasing the Company’s interest in Inotera to 29.8%.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity Method Investments – DRAM joint ventures with Nanya.”)

On July 10, 2009, the Company sold a 65% interest in Aptina Imaging Corporation (“Aptina”), a wholly-owned subsidiary of the Company.  The Company continues to manufacture products for Aptina under a wafer supply agreement.  The Company accounts for its remaining interest in Aptina under the equity method.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity Method Investments – Aptina.”)

The Company formed two joint ventures (collectively “IM Flash”) with Intel Corporation to manufacture NAND Flash memory products for the exclusive benefit of the partners:  IM Flash Technologies, LLC, which began operations in the second quarter of 2006, and IM Flash Singapore LLP, which began operations in the third quarter of 2007.  The Company owns 51% and Intel owns 49% of IM Flash.  The financial results of IM Flash are included in the consolidated financial statements of the Company.  (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Consolidated Variable Interest Entities – NAND Flash joint venture with Intel.”)

The Company began consolidating the financial results of its TECH Semiconductor joint venture (“TECH”) as of the beginning of the third quarter of 2006.  In the third quarter of 2007, the Company acquired all of the shares of TECH common stock held by Singapore Economic Development Board, which increased the Company’s ownership interest in TECH from approximately 43% to approximately 73%.  As a result of the purchases of TECH shares in 2009, the Company’s ownership interest in TECH was increased from to approximately 73% as of August 28, 2008 to approximately 85% in August 2009.   (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – TECH Semiconductor Singapore Pte. Ltd.”)

In the fourth quarter of 2006, the Company acquired Lexar Media, Inc., a designer, developer, manufacturer and marketer of Flash memory products, in a stock-for-stock merger.

(See “Item 1A. Risk Factors” and “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements.”)


 
26

 

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in “Overview” regarding Inotera's transition to the Company's stack process technology and anticipated margins and operating expenses for the Imaging segment in future periods; in “Net Sales” regarding DRAM production received from Inotera in 2010, future increases in NAND Flash production, and future Imaging revenue under an imaging wafer supply agreement with Aptina; in “Gross Margin” regarding future charges from Inotera for underutilized capacity, future charges for inventory write-downs, gross margins from the Company’s imaging wafer supply agreement with Aptina; in “Selling, General and Administrative” regarding future legal expenses;   in “Research and Development” regarding reductions of future research and development expenses in connection with the sale of a majority interest in Aptina; in “Restructure” regarding future levels of employees; in “Stock-based Compensation” regarding future costs to be recognized; in “Liquidity and Capital Resources” regarding capital spending in 2010, future distributions from IM Flash to Intel and capital contributions to TECH; and in “Recently Issued Accounting Standards” regarding the impact from the adoption of new accounting standards. The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in “Item 1A.  Risk Factors.” This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended September 3, 2009.  All period references are to the Company’s fiscal periods unless otherwise indicated. The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  All tabular dollar amounts are in millions.  The Company’s fiscal 2009, which ended on September 3, 2009, contained 53 weeks and its fiscal 2008 and fiscal 2007 both contained 52 weeks.  All production data includes production of the Company and its consolidated joint ventures and the Company’s supply from Inotera.


Overview

The Company is a global manufacturer and marketer of semiconductor devices, principally DRAM and NAND Flash memory.  In addition the Company manufactures CMOS image sensor products under a wafer foundry arrangement.  The Company operates in two reportable segments:  Memory and Imaging.  Its products are used in a broad range of electronic applications including personal computers, workstations, network servers, mobile phones and other consumer applications including Flash memory cards, USB storage devices, digital still cameras, MP3/4 players and in automotive applications.  The Company markets its products through its internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers and retailers located around the world.  The Company’s success is largely dependent on the market acceptance of a diversified portfolio of semiconductor products, efficient utilization of the Company’s manufacturing infrastructure, successful ongoing development of advanced process technologies and generation of sufficient return on research and development investments.

The Company has made significant investments to develop proprietary product and process technology that is implemented in its worldwide manufacturing facilities and through its joint ventures to enable the production of semiconductor products with increasing functionality and performance at lower costs.  The Company generally reduces the manufacturing cost of each generation of product through advancements in product and process technology such as its leading-edge line-width process technology and innovative array architecture.  The Company continues to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption and increased memory density.  To leverage its significant investments in research and development, the Company has formed various strategic joint ventures under which the costs of developing memory product and process technologies are shared with its joint venture partners.  In addition, from time to time, the Company has also sold and/or licensed technology to other parties.  The Company is pursuing additional opportunities to recover its investment in intellectual property through partnering and other arrangements.

The semiconductor memory industry is experiencing a severe downturn due to a significant oversupply of products.  The downturn has been exacerbated by global economic conditions which have adversely affected demand for semiconductor memory products.  Average selling prices per gigabit for the Company’s DRAM and NAND Flash products declined 52% and 56%, respectively, for 2009 as compared to 2008, after declining 51% and 67%, respectively, for 2008 as compared to 2007, and declining 23% and 56%, respectively, for 2007 as compared to 2006.  These declines significantly outpaced the long-term historical pricing trend.  As a result of these market conditions, the Company and other semiconductor memory manufacturers reported substantial losses in recent periods.  The Company reported a net loss of $1.8 billion for 2009 after reporting net losses of $1.6 billion for 2008 and $320 million for 2007.

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In response to adverse market conditions, the Company initiated restructure plans in 2009, primarily within the Company’s Memory segment.  In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel Corporation, terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month.  The Company and Intel also agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility.  In addition, the Company phased out all remaining 200mm DRAM wafer manufacturing operations at its Boise, Idaho, facility in the second half of 2009.

Inotera Memories, Inc. (“Inotera”):   In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a publicly-traded entity in Taiwan, from Qimonda AG (“Qimonda”) for $398 million.  The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received from Nan Ya Plastics Corporation and $85 million received from Inotera.  Nan Ya Plastics is an affiliate of Nanya Technology Corporation (“Nanya”), a then 35.6% shareholder in Inotera. The loans were recorded at their fair values which reflect an aggregate discount of $31 million from their face amounts.  This aggregate discount was recorded as a reduction of the Company’s basis in its investment in Inotera.  The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition.  As a result of the above transactions, the initial carrying value of the Company’s investment in Inotera was $377 million.  On August 3, 2009, Inotera issued shares in a public offering for approximately $310 million that reduced the Company and Nanya’s ownership in Inotera to 29.8% and 29.9%, respectively.  As a result of Inotera’s public offering, the Company will recognize a gain of $59 million in the first quarter of 2010.

In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the “Inotera Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya.  The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity.  Inotera’s actual wafer production will vary from time to time based on market and other conditions.  Inotera’s trench production is expected to transition to the Company’s stack process technology.  Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity, if any.  The cost to the Company of wafers purchased under the Inotera Supply Agreement is based on a margin sharing formula among the Company, Nanya and Inotera.  Under such formula, all parties’ manufacturing costs related to wafers supplied by Inotera, as well as the Company’s and Nanya’s selling prices for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers from Inotera.  Under the Inotera Supply Agreement.  The Company’s purchase obligation includes purchasing Inotera’s trench DRAM capacity (less any trench DRAM products sold to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the “Qimonda Supply Agreement”)).  Under the Qimonda Supply Agreement, Qimonda was obligated to purchase trench DRAM products resulting from wafers started for it by Inotera through July 2009 in accordance with a ramp down schedule specified in the Qimonda Supply Agreement.  In the second quarter of 2009, Qimonda filed for bankruptcy protection and defaulted on its obligations to purchase products from Inotera.  Pursuant to the Company’s obligations under the Inotera Supply Agreement, the Company recorded $95 million of charges to cost of goods sold in 2009 for underutilized capacity.

The Company’s results of operations for 2009 also include losses of $130 million for the Company’s share of Inotera’s losses from the acquisition date through the second calendar quarter of 2009.  The Company accounts for its interest in Inotera under the equity method and does not consolidate Inotera.  The Company recognizes its share of earnings or losses from Inotera for a period that lags the Company’s fiscal periods by two months.  As of September 3, 2009, the Company had recorded $3 million to accumulated other comprehensive income in the accompanying consolidated balance sheet for cumulative translation adjustments for its investment in Inotera.  During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement.  As of September 3, 2009, the carrying value of the Company’s equity investment in Inotera was $229 million.

(See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments – DRAM joint ventures with Nanya”)


 
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Aptina Imaging Corporation (“Aptina”):   On July 10, 2009, the Company sold a 65% interest in Aptina, previously a wholly-owned subsidiary of the Company and a significant component of the Company’s Imaging segment, to Riverwood Capital (“Riverwood”) and TPG Capital (“TPG”).  In connection with the transaction, the Company received approximately $35 million in cash and retained a 35% interest in Aptina.  A portion of the 65% interest held by Riverwood and TPG are convertible preferred shares and have a liquidation preference over the common shares.  As a result, the Company’s interest represents 64% of Aptina’s common stock.  The Company also retained all cash held by Aptina and its subsidiaries.  The Company recorded a loss of $41 million in connection with the sale. Under the equity method, the Company will recognize its share of Aptina’s results of operations based on its 64% share of Aptina’s common stock on a two-month lag beginning in 2010.  As of September 3, 2009, the Company’s investment in Aptina was $44 million.  The Company’s Imaging segment continues to manufacture products for Aptina under a wafer supply agreement.  The Company anticipates that pricing under the Aptina wafer supply agreement will generally result in lower gross margins than historically realized on sales of Imaging products to end customers.  The Company also anticipates that the sale of majority interest in Aptina will significantly reduce the Imaging segment’s research and development costs and other operating expenses.  (See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments - Aptina”)

Inventory write-downs:   The Company’s results of operations for the second and first quarters of 2009 included charges of $234 million and $369 million, respectively, to write down the carrying value of work in process and finished goods inventories of memory products (both DRAM and NAND Flash) to their estimated market values.  For the fourth, second and first quarters of 2008, the Company recorded inventory charges of $205 million, $15 million and $62 million, respectively.


Results of Operations

   
2009
     
2008
     
2007
     
   
(in millions and as a percent of net sales)
     
                                       
Net sales:
                                     
Memory
  $ 4,290       89   %   $ 5,188       89   %   $ 5,001       88   %
Imaging
    513       11   %     653       11   %     687       12   %
    $ 4,803       100   %   $ 5,841       100   %   $ 5,688       100   %
                                                         
Gross margin:
                                                       
Memory
  $ (521 )     (12 %   $ (241 )     (5 %   $ 845       17   %
Imaging
    82       16   %     186       28   %     233       34   %
    $ (439 )     (9 %   $ (55 )     (1 %   $ 1,078       19   %
                                                         
Selling, general and administrative
  $ 354       7   %   $ 455       8   %   $ 610       11   %
Research and development
    647       13   %     680       12   %     805       14   %
Restructure
    70       1   %     33       1   %     19       0   %
Goodwill impairment
    58       1   %     463       8   %     --       --    
Other operating (income) expense, net
    107       2   %     (91 )     (2 %     (76 )     (1 %
Net income (loss)
    (1,835 )     (38 %     (1,619 )     (28 %     (320 )     (6 %

The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.

Net Sales

Total net sales for 2009 decreased 18% as compared to 2008 primarily due to a 17% decrease in Memory sales and a 21% decrease in Imaging sales.  Memory sales for 2009 reflect significant declines in per gigabit average selling prices partially offset by significant increases in gigabits sold as compared to 2008.  Memory sales were 89% of total net sales for 2009 and 2008 and 88% for 2007.  The 21% decrease in Imaging sales for 2009 was primarily due to lower sales volume and average sales prices.  Total net sales for 2008 increased 3% as compared to 2007 primarily due to a 4% increase in Memory sales partially offset by a 5% decrease in Imaging sales.


 
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In response to adverse market conditions, the Company shut down production of NAND for IM Flash at the Company’s Boise fabrication facility beginning in the second quarter of 2009 and phased out the remainder of its 200mm DRAM production at the Boise fabrication facility in the second half of 2009.  In addition, the Company implemented production slowdowns at some of its manufacturing facilities during 2009.  Production of Memory and Imaging products in 2009 was affected by the shutdown of the Boise fabrication facility and slowdowns at other facilities.  The Company will adjust utilization of 200mm wafer processing capacity as product demand varies.

The Company has formed partnering arrangements under which it has sold and/or licensed technology to other parties.  The Company’s Memory segment recognized royalty and license revenue of $135 million in 2009 and $58 million in 2008.

Memory:   Memory sales for 2009 decreased 17% from 2008 primarily due to a 23% decrease in sales of DRAM products and a 10% decrease in sales of NAND Flash products.

Sales of DRAM products for 2009 decreased from 2008 primarily due to a 52% decline in average selling prices mitigated by a 56% increase in gigabits sold.  Gigabit production of DRAM products increased 52% for 2009 despite the shutdown of the Boise fabrication facility and production slowdowns at other 200mm wafer fabrication facilities.  The DRAM production increase was primarily due to production efficiencies achieved primarily through transitions to higher density, advanced geometry devices.  In the fourth quarter of 2009, the Company began receiving trench DRAM products from Inotera.  The Company expects that in 2010 its DRAM production will increase as a result of increases in stack and trench DRAM production purchased from Inotera. Sales of DDR2 and DDR3 DRAM, the Company’s highest volume products, were 29% of the Company’s total net sales for 2009 and 2008 and were 32% for 2007.

The Company sells NAND Flash products in three principal channels: 1) to Intel Corporation (“Intel”) through its IM Flash consolidated joint venture at long-term negotiated prices approximating cost, 2) to original equipment manufacturers (“OEM’s”) and other resellers and 3) to retail customers.  Aggregate sales of NAND Flash products for 2009 decreased 10% from 2008 and represented 39% of the Company’s total net sales for 2009 as compared to 35% for 2008 and 23% for 2007

Sales through IM Flash to Intel were $886 million for 2009, $1,037 million for 2008 and $497 million for 2007.  For 2009, average selling prices for IM Flash sales to Intel decreased significantly due to a 61% reduction in costs per gigabit.  However, gigabit sales to Intel were 110% higher in 2009 as compared to 2008 primarily due to an 85% increase in gigabit production of NAND Flash products over the same period as a result of the Company’s continued transition to higher density 34 nanometer (nm) NAND Flash products and other improvements in product and process technologies.  The increase in NAND Flash production was achieved despite the shutdown of 200mm NAND Flash production which began in the second quarter of 2009.  The Company expects that its gigabit production of NAND Flash products will continue to increase in 2010 but at a slower rate than in 2009.

Aggregate sales of NAND Flash products to the Company’s OEM, resellers and retail customers were 4% lower for 2009 as compared to 2008 primarily due a 52% decline in average selling prices, partially offset by a 100% increase in gigabit sales.  Average selling prices to the Company’s OEM and reseller customers for 2009 decreased approximately 41% compared to 2008, while average selling prices of the Company’s Lexar brand, directed primarily at the retail market, decreased approximately 62% for 2009 compared to 2008.

Memory sales for 2008 increased 4% from 2007 primarily due to a 55% increase in sales of NAND Flash products offset by a 15% decrease in sales of DRAM products.  Sales of NAND Flash products for 2008 increased from 2007 primarily due to an increase of approximately 370% in gigabits sold as a result of production increases partially offset by a decline of 67% in average selling prices per gigabit.  Gigabit production of NAND Flash products increased approximately 350% for 2008 as compared to 2007, primarily due to the continued ramp of NAND Flash products at the Company’s 300mm fabrication facilities and transitions to higher density, advanced geometry devices.  Sales of DRAM products for 2008 decreased from 2007 primarily due to a decline of 51% in average selling prices (which included the effects of a $50 million charge to revenue in the first quarter of 2007 as a result of a settlement agreement with a class of direct purchasers of certain DRAM products), mitigated by an increase in gigabits sold of approximately 70%.  Gigabit production of DRAM products increased approximately 70% for 2008, primarily due to production efficiencies from improvements in product and process technologies, including TECH’s conversion to 300mm wafer fabrication.


 
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Imaging:   Imaging sales for 2009 decreased by 21% from 2008 primarily due to decreased unit sales and declines in average selling prices.  Demand for Imaging products in 2009 was adversely impacted by weakness in the mobile phone markets.   Imaging sales for 2009 were also negatively impacted by the Company’s sale of a 65% interest in Aptina on July 10, 2009.  After the sale of the Company’s 65% interest in Aptina, Imaging’s revenue is derived entirely from sales of Imaging wafers to Aptina under a wafer supply agreement.  The Company anticipates that pricing under the wafer supply agreement will generally result in lower revenue than historically realized on sales by the Company of Imaging products to end customers.  Imaging sales for 2008 decreased 5% from 2007 primarily due to significant declines in average selling prices by product type partially offset by a shift in product mix from products with 1-megapixel or lower resolution to products with 3-megapixel or higher resolution, which had higher average selling prices per unit.  Imaging sales were 11% of the Company’s total net sales for 2009 and 2008 and 12% for 2007.

Gross Margin

The Company’s overall gross margin percentage declined from negative 1% for 2008 to negative 9% for 2009 due to declines in the gross margins for both Memory and Imaging primarily as a result of severe pricing pressure mitigated by cost reductions.  The Company’s overall gross margin percentage declined from 19% for 2007 to negative 1% for 2008 primarily due to a decrease in the gross margin percentage for Memory as a result of significant declines in average selling prices.  Production slowdowns implemented at some of the Company’s 200mm manufacturing facilities during 2009 adversely affected per gigabit costs of Memory products and per unit costs of Imaging products.

Memory:   The Company’s gross margin percentage for Memory products declined from negative 5% for 2008 to negative 12% for 2009 primarily due to declines in the gross margin for DRAM products partially offset by improvements in the gross margin for NAND Flash products.  Gross margins for 2009 were positively affected by significant cost reductions for DRAM and NAND Flash products and the effects of selling memory products that were subject to inventory write-downs in 2008, as discussed in more detail below.  Gross margins for Memory products in 2009 were adversely affected by $187 million of costs associated with underutilized capacity, primarily from Inotera and IM Flash’s Singapore facility.  The Company expects that underutilized capacity costs from Inotera will decrease substantially in 2010 as Inotera increases its utilization of production capacity.

The Company’s gross margins for Memory in 2009, 2008 and 2007 were impacted by charges to write down inventories to their estimated market values as a result of the significant decreases in average selling prices for both DRAM and NAND Flash products.  As charges to write down inventories are recorded in advance of when inventories are sold, gross margins in subsequent reporting periods are higher than they otherwise would be.  The impact of inventory write-downs on gross margins for all periods reflects inventory write-downs less the estimated net effect of prior period write-downs.  The effects of inventory write-downs on gross margin by period were as follows:

   
2009
   
2008
   
2007
 
                   
Inventory write-downs
  $ (603 )   $ (282 )   $ (20 )
Estimated effect of previous inventory write-downs
    767       98       --  
Net effect of inventory write-downs
  $ 164     $ (184 )   $ (20 )

In future periods, the Company will be required to record additional inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories at a quarter-end date are below the manufacturing cost of those products.

Declines in gross margins on sales of DRAM products for 2009 as compared to 2008 were primarily due to the 52% decline in average selling prices mitigated by 40% reduction in costs per gigabit.  The reduction in DRAM costs per gigabit was primarily due to production efficiencies achieved through transitions to higher-density, advanced-geometry devices.  DRAM production costs for 2009 were adversely impacted by $95 million of underutilized capacity costs from Inotera.

The Company’s gross margin on sales of NAND Flash products for 2009 improved from 2008, despite a 56% decrease in overall average selling prices per gigabit, primarily due to a 61% reduction in costs per gigabit.  The reduction in NAND Flash costs per gigabit was primarily due to lower manufacturing costs as a result of increased production of higher-density, advanced-geometry devices, in particular from the Company’s transition to 34nm process technology.  Gross margins on sales of NAND Flash products reflect sales of approximately half of IM Flash’s output to Intel at long-term negotiated prices approximating cost.

31

The Company’s gross margin percentage for Memory products declined from 17% for 2007 to negative 5% for 2008 primarily due to the significant decreases in average selling prices, write-downs of inventories to their estimated market values and the shift in product mix to NAND Flash products (which had a significantly lower gross margin than DRAM products in 2008), mitigated by cost reductions.  The Company’s gross margin for DRAM products for 2008 declined from 2007, primarily due to the 51% decline in average selling prices per gigabit mitigated by a 38% reduction in costs per gigabit.  Cost reductions in 2008 for DRAM products were partially offset by inventory write-downs.  The Company’s gross margin for NAND Flash products for 2008 declined from 2007 primarily due to the 67% decline in average selling prices per gigabit mitigated by a 64% reduction in costs per gigabit.  Cost reductions in 2008 primarily reflect lower manufacturing costs and lower costs of NAND Flash products purchased for sale under the Company’s Lexar brand.   NAND Flash costs for 2008 were also reduced by a recovery of $70 million for price adjustments for NAND Flash products purchased from other suppliers in prior periods.  Cost reductions in 2008 for NAND Flash Products were partially offset by inventory write-downs.

Imaging:   The Company’s gross margin percentage for Imaging declined from 28% for 2008 to 16% for 2009 primarily due to declines in average selling prices and costs associated with underutilized production capacity.  The decrease in the gross margin percentage for 2009 was mitigated by a shift in product mix to products with 3-megapixels or more, which realized higher margins.  Imaging gross margins subsequent to the Company’s sale of a 65% interest in Aptina on July 10, 2009, are affected by the transition to a wafer foundry manufacturing model where Imaging sells all of its output to Aptina under a wafer supply agreement.  The Company anticipates that pricing under the wafer supply agreement will generally result in lower gross margins than historically realized by the Company on sales of Imaging products to end customers.  The Company’s gross margin for Imaging declined to 28% for 2008 from 34% for 2007 primarily due to declines in average selling prices mitigated by cost reductions and a shift to higher resolution products that realized better gross margins.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for 2009 decreased 22% from 2008, primarily due to lower payroll expenses and other costs related to the Company’s restructure initiatives and lower legal expenses.  Lower payroll expenses reflect reductions in headcount, variable pay, salary levels and employee benefits.  SG&A expenses for 2008 decreased 25% from 2007 primarily due to lower legal costs as well as lower payroll costs and other expenses driven by the Company’s restructure initiatives.  The reduction of payroll costs in 2008 was primarily the result of a decrease in employee headcount.  In 2007, the Company recorded a $31 million charge to SG&A as a result of the settlement of certain antitrust class action (direct purchaser) lawsuits.  Future SG&A expense is expected to vary, potentially significantly, depending on, among other things, the number of legal matters that are resolved relatively early in their life-cycle and the number of matters that progress to trial.  SG&A expenses by segment were as follows:

   
2009
   
2008
   
2007
 
                   
Memory segment
  $ 315     $ 385     $ 532  
Imaging segment
    39       70       78  
    $ 354     $ 455     $ 610  

Research and Development

Research and development (“R&D”) expenses vary primarily with the number of development wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs.  Because of the lead times necessary to manufacture its products, the Company typically begins to process wafers before completion of performance and reliability testing.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability.  R&D expenses can vary significantly depending on the timing of product qualification as costs incurred in production prior to qualification are charged to R&D.

R&D expenses for 2009 decreased 5% from 2008 primarily due to lower payroll costs and decreases in costs of development wafers processed.  Lower payroll expenses reflect reductions in variable pay, salary levels and employee benefits.  R&D expenses were reduced by $107 million in 2009, $148 million in 2008 and $240 million in 2007 for amounts reimbursable from Intel under a NAND Flash R&D cost-sharing arrangement.  R&D expenses for 2008 decreased 16% from 2007 primarily due to decreases in development wafers processed and lower payroll costs driven by the Company’s restructure initiatives.  The Company expects that the sale of a majority interest in Aptina in the fourth quarter of 2009 will reduce R&D expenses in future periods.  R&D expenses by segment were as follows:

 
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2009
   
2008
   
2007
 
                   
Memory segment
  $ 529     $ 536     $ 648  
Imaging segment
    118       144       157  
    $ 647     $ 680     $ 805  

The Company’s process technology research and development (“R&D”) efforts are focused primarily on development of successively smaller line-width process technologies which are designed to facilitate the Company’s transition to next generation memory products.  Additional process technology R&D efforts focus on the enablement of advanced computing and mobile memory architectures, the investigation of new opportunities that leverage the Company’s core semiconductor expertise, and the development of new manufacturing materials.  Product design and development efforts are concentrated on the Company’s high density DDR3 and mobile products, as well as high density and mobile NAND Flash memory (including MLC technology), specialty memory products and memory systems.

Restructure

In response to a severe downturn in the semiconductor memory industry and global economic conditions, the Company initiated restructure plans in 2009 primarily within the Company’s Memory segment.  In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel, terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month.  In connection with the termination of the NAND Flash memory supply agreement, Intel paid the Company $208 million in 2009.  The Company and Intel also agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility.  In addition, the Company phased out all remaining 200mm DRAM wafer manufacturing operations in Boise, Idaho in the second half of 2009.  As a result of these restructure plans, the Company reduced employment in 2009 by approximately 4,600 employees, or approximately 20%.  Due to improvements in market conditions and the pursuit of new business opportunities, future reduction in employees may not occur.  In 2008 and 2007, to reduce costs, the Company implemented restructure initiatives including workforce reductions and relocating and outsourcing certain of its operations.  The following table summarizes restructure charges (credits) resulting from the Company’s restructure activities:

   
2009
   
2008
   
2007
 
                   
Write-down of equipment
  $ 152     $ --     $ --  
Severance and other employee costs
    60       23       18  
Gain from termination of NAND Flash supply agreement
    (144 )     --       --  
Other
    2       10       1  
    $ 70     $ 33     $ 19  

Goodwill Impairment

In the second quarter of 2009, the Company’s Imaging segment experienced a severe decline in sales, margins and profitability due to a significant decline in demand for products as a result of the downturn in global economic conditions.  The drop in market demand resulted in significant declines in average selling prices and unit sales.  Due to these market and economic conditions, the Company’s Imaging segment and its competitors experienced significant declines in market value.  As a result, the Company concluded that there were sufficient factual circumstances for interim impairment analyses under SFAS No. 142 and it performed an assessment of goodwill for impairment.  Based on the results of the impairment analysis, the Company wrote off all $58 million of goodwill relating to its Imaging segment in the second quarter of 2009.

In the first and second quarters of 2008, the Company experienced a sustained, significant decline in its stock price.  As a result of the decline in stock price, the Company’s market capitalization fell significantly below the recorded value of its consolidated net assets for most of the second quarter of 2008.  The reduced market capitalization reflected, in part, the Memory segment’s lower average selling prices and expected continued weakness in pricing for the Company’s Memory products.  Due to these market and economic conditions, the Company concluded that there were sufficient factual circumstances for interim impairment analyses of its Memory segment under SFAS No. 142 and it performed an assessment of goodwill for impairment.  Based on the results of the impairment analysis, the Company wrote off all $463 million of goodwill relating to its Memory segment in the second quarter of 2008.

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(See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Goodwill.”)

Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

   
2009
   
2008
   
2007
 
                   
(Gain) loss on disposition of property, plant and equipment
  $ 54     $ (66 )   $ (43 )
Loss on sale of majority interest in Aptina
    41       --       --  
Losses from changes in currency exchange rates
    30       25       14  
Other
    (18 )     (50 )     (47 )
    $ 107     $ (91 )   $ (76 )

In the table above, “Other” for 2008 included $38 million for receipts from the U.S. government in connection with anti-dumping tariffs and for 2007, included $30 million from the sale of certain intellectual property to Toshiba Corporation and $7 million in grants received in connection with the Company’s operations in China.

Income Taxes

Income taxes for 2009, 2008 and 2007 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax.  The Company has a valuation allowance for its net deferred tax asset associated with its U.S. operations.  The benefit for taxes on U.S. operations in 2009, 2008 and 2007 was substantially offset by changes in the valuation allowance.  As of September 3, 2009, the Company had aggregate U.S. tax net operating loss carryforwards of $4.2 billion and unused U.S. tax credit carryforwards of $212 million.  The Company also had unused state tax net operating loss carryforwards of $2.6 billion and unused state tax credits of $198 million as of September 3, 2009.  Substantially all of the net operating loss carryforwards expire in 2022 to 2029 and substantially all of the tax credit carryforwards expire in 2013 to 2029.  Due to the expiration of certain foreign statutes of limitations, the Company recognized approximately $15 million of previously unrecognized tax benefits in 2008.

Equity in Net Losses of Equity Method Investees

In connection with its DRAM partnering arrangements with Nanya, the Company has investments in two Taiwan DRAM memory companies accounted for as equity method investments:  Inotera and MeiYa.  Inotera and MeiYa each have fiscal years that end on December 31.  The Company recognizes its share of Inotera’s and MeiYa’s quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter.  This results in the recognition of the Company’s share of earnings or losses from these entities for a period that lags the Company’s fiscal periods by two months.  The Company recognized losses from these equity method investments of $140 million for 2009.

As a result of its sale of a 65% interest in its Aptina subsidiary on July 10, 2009, the Company’s investment in Aptina is accounted for as an equity method investment.  The Company’s shares in Aptina constitute 35% of Aptina’s total common and preferred stock and 64% of Aptina’s common stock.  Under the equity method, the Company recognizes its share of Aptina’s results of operations based on its 64% share of Aptina’s common stock on a two-month lag beginning in 2010.

(See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments.”)

Noncontrolling Interests in Net (Income) Loss

Noncontrolling interests for 2009, 2008 and 2007 primarily reflects the share of income or losses of the Company’s TECH joint venture attributed to the noncontrolling interests in TECH.  The Company purchased $99 million of TECH shares on February 27, 2009, $99 million of TECH shares on June 2, 2009, and $60 million of TECH shares on August 27, 2009.  As a result, noncontrolling interests in TECH were reduced from approximately 27% as of August 28, 2008 to approximately 15% in August 2009.  (See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – TECH Semiconductor Singapore Pte. Ltd.”)


 
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Stock-based Compensation

Total compensation cost for the Company’s equity plans in 2009, 2008 and 2007 was $44 million, $48 million and $44 million, respectively.  Stock compensation expenses fluctuate based on assessments of whether performance conditions will be achieved for the Company’s performance-based stock grants.  As of September 3, 2009, $71 million of total unrecognized compensation cost related to non-vested awards was expected to be recognized through the fourth quarter of 2013.


Liquidity and Capital Resources

As of September 3, 2009, the Company had cash and equivalents and short-term investments totaling $1,485 million compared to $1,362 million as of August 28, 2008.  The balance as of September 3, 2009, included $114 million held at the Company’s IM Flash joint ventures and $188 million held at the Company’s TECH joint venture.  The Company’s ability to access funds held by the joint ventures to finance the Company’s other operations is subject to agreement by the joint venture partners, debt covenants and contractual limitations.  Amounts held by TECH are not anticipated to be available to finance the Company’s other operations.

The Company’s liquidity is highly dependent on average selling prices for its products and the timing of capital expenditures, both of which can vary significantly from period to period.  Depending on conditions in the semiconductor memory market, the Company’s cash flows from operations and current holdings of cash and investments may not be adequate to meet the Company’s needs for capital expenditures and operations.  Historically, the Company has used external sources of financing to fund these needs.  Due to conditions in the credit markets, it may be difficult to obtain financing on terms acceptable to the Company.  The Company significantly reduced its actual capital expenditures for 2009 and planned capital expenditures for 2010.  In addition, the Company is considering further financing alternatives, continuing to limit capital expenditures and implementing further cost reduction initiatives.

Operating activities:   Net cash provided by operating activities was $1,206 million in 2009 which reflected approximately $642 million generated from the production and sales of the Company’s products and approximately $564 million provided from the management of working capital.  Specifically, the Company reduced the amount of working capital as of September 3, 2009 invested in inventories by $304 million and receivables by $126 million as compared to August 28, 2008.

Investing activities:   Net cash used for investing activities was $674 million in 2009, which included cash expenditures of $488 million for property, plant and equipment and cash expenditures of $408 million for the acquisition of a 35.5% interest in Inotera, partially offset by the net effect of maturities and purchases of marketable investment securities of $124 million.  A significant portion of the capital expenditures related to IM Flash and TECH operations.  The Company believes that to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technologies, facilities and capital equipment and research and development.  The Company expects that capital spending will be approximately $750 million to $850 million for 2010.  As of September 3, 2009, the Company had commitments of approximately $276 million for the acquisition of property, plant and equipment, most of which is expected to be paid within one year.

Financing activities:   Net cash used for financing activities was $290 million in 2009, which primarily reflects $705 million of distributions to joint venture partners, $429 million in debt payments and $144 million in payments on equipment purchase contracts, partially offset by $716 million in proceeds from borrowings and $276 million in net proceeds from the issuance of common stock.

On April 15, 2009, the Company issued 69.3 million shares of common stock for $4.15 per share in a registered public offering.  The Company received net proceeds of $276 million after deducting underwriting fees and other offering costs of $12 million.

On April 15, 2009, the Company issued $230 million of 4.25% Convertible Senior Notes due October 15, 2013 (the “4.25% Senior Notes”).  Issuance costs associated with the 4.25% Senior Notes totaled $7 million. The initial conversion rate for the 4.25% Senior Notes is 196.7052 shares of common stock per $1,000 principal amount of the 4.25% Senior Notes. This is equivalent to an initial conversion price of approximately $5.08 per share of common stock. Holders of the 4.25% Senior Notes may convert their 4.25% Senior Notes at any time prior to maturity, unless previously redeemed or repurchased.  The Company may not redeem the 4.25% Senior Notes prior to April 20, 2012.  On or after April 20, 2012, the Company may redeem for cash all or part of the 4.25% Senior Notes if the closing price of its common stock has been at least 135% of the conversion price for at least 20 trading days during a 30 consecutive trading day period.

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Concurrent with the offering of the 4.25% Senior Notes, the Company also entered into capped call transactions (the “2009 Capped Calls”) that have an initial strike price of approximately $5.08 per share, subject to certain adjustments, which was set to equal the initial conversion price of the 4.25% Senior Notes.  The 2009 Capped Calls have a cap price of $6.64 per share and cover an approximate combined total of 45.2 million shares of common stock, and are subject to standard adjustments for instruments of this type.  The 2009 Capped Calls are intended to reduce the potential dilution upon conversion of the 4.25% Senior Notes.  If, however, the market value per share of the common stock, as measured under the terms of the 2009 Capped Calls, exceeds the applicable cap price of the 2009 Capped Calls, there would be dilution to the extent that the then market value per share of the common stock exceeds the cap price.  The 2009 Capped Calls expire in October and November of 2012.  The Company paid approximately $25 million to purchase the 2009 Capped Calls.

On February 23, 2009, the Company entered into a Singapore dollar-denominated term loan agreement with the Singapore Economic Development Board (“EDB”) enabling the Company to borrow up to $300 million Singapore dollars at 5.4% per annum.  The terms of the agreement require the Company to use the proceeds from any borrowings under the agreement to make equity contributions to its TECH Company’s joint venture subsidiary.  The loan agreement further required that TECH use the proceeds from the Company’s equity contributions to purchase production assets and meet certain production milestones related to the implementation of advanced process manufacturing.  The loan contains a covenant that limits the amount of indebtedness TECH can incur without approval from the EDB.  The loan is collateralized by the Company’s shares in TECH up to a maximum of 66% of TECH’s outstanding shares.  The Company drew $150 million Singapore dollars in the second quarter of 2009 and an additional $150 million Singapore dollar in the third quarter of 2009.  The aggregate $300 million Singapore dollars outstanding ($208 million U.S. dollars as of September 3, 2009) is due in February 2012 with interest payable quarterly.

In the first quarter of 2009, in connection with its purchase of its interest in Inotera, the Company entered into a two-year, variable rate term loan with Nan Ya Plastics and a six-month, variable rate term loan with Inotera.  The Company received loan proceeds of $200 million from Nan Ya Plastics and $85 million from Inotera.  The Company repaid the $85 million Inotera loan in the third quarter of 2009.  Under the terms of the Nan Ya Plastics loan agreement, interest is payable quarterly at LIBOR plus 2%.  The interest rate resets quarterly and was 2.4% per annum as of September 3, 2009.  Based on imputed interest rate of 12.1%, the Company recorded the Nan Ya Plastics loan net of a discount of $28 million, which is recognized as interest expense over the life of the loan.  The Nan Ya Plastics loan is collateralized by a first priority security interest in the Inotera shares owned by the Company (approximate carrying value of $229 million as of September 3, 2009).

In 2008, the Company’s TECH joint venture subsidiary drew $600 million under a credit facility at SIBOR plus 2.5%.  The credit facility is collateralized by substantially all of the assets of TECH (approximately $1,498 million as of September 3, 2009) and contains covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios, and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets.  TECH repaid $50 million of principal amounts in 2009 and remaining payments are due in $50 million quarterly installments from September 2009 through May 2012.  Under the terms of the credit facility, TECH held $30 million in restricted cash as of September 3, 2009, which was increased to $60 million in the first quarter of 2010.  The Company has guaranteed approximately 85% of the outstanding amount borrowed under TECH’s credit facility and the Company’s guarantee could increase up to 100% of the outstanding amount borrowed under the facility based on further increases in the Company’s ownership interest in TECH and other conditions.

(See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Debt.”)

Joint ventures:   In 2009, IM Flash distributed $695 million to Intel and the Company expects that it will make additional distributions to Intel in 2010.  Timing of these distributions and any future contributions, however, is subject to market conditions and approval of the partners.

The Company purchased $99 million of TECH shares on February 27, 2009, $99 million of TECH shares on June 2, 2009, and $60 million of TECH shares on August 27, 2009.  As a result, the Company’s ownership interest in TECH increased from approximately 73% as of August 28, 2008 to approximately 85% in August 2009. The Company expects to make additional capital contributions to TECH in 2010 to support its continued transition to 50nm wafer processing.  The timing and amount of these contributions is subject to market conditions.


 
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Contractual obligations:   The following table summarizes the Company’s significant contractual obligations at September 3, 2009, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods.

   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
                               
Notes payable (1)
  $ 2,785     $ 337     $ 854     $ 1,594     $ --  
Capital lease obligations (1)
    650       188       323       42       97  
Operating leases
    73       17       24       17       15  
Purchase obligations
    642       469       146       9       18  
Other long-term liabilities
    249       --       111       35       103  
Total
  $ 4,399     $ 1,011     $ 1,458     $ 1,697     $ 233  
                                         
(1) Includes interest
                                       

The obligations disclosed above do not include contractual obligations recorded on the Company’s balance sheet as current liabilities except for the current portion of long-term debt.  The expected timing of payment amounts of the obligations discussed above is estimated based on current information.  Timing and actual amounts paid may differ depending on the timing of receipt of goods or services, market prices or changes to agreed-upon amounts for some obligations.

Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancelable, (2) the Company would incur a penalty if the agreement was cancelled, or (3) the Company must make specified minimum payments even if it does not take delivery of the contracted products or services (“take-or-pay”).  If the obligation to purchase goods or services is noncancelable, the entire value of the contract was included in the above table.  If the obligation is cancelable, but the Company would incur a penalty if cancelled, the dollar amount of the penalty was included as a purchase obligation.  Contracted minimum amounts specified in take-or-pay contracts are also included in the above table as they represent the portion of each contract that is a firm commitment.

Pursuant to the Inotera Supply Agreement, the Company has an obligation to purchase up to 50% of Inotera’s output of semiconductor memory components subject to specific terms and conditions.  As purchase quantities are based on qualified production output, the Inotera Supply Agreement does not contain a fixed or minimum purchase quantity and therefore the Company did not include its obligations under the Inotera Supply Agreement in the contractual obligations table above.  The Company’s obligation under the Inotera Supply Agreement also fluctuates due to pricing which is based on manufacturing costs and margins associated with the resale of DRAM products.  Pursuant to the Company’s obligations under the Inotera Supply Agreement, the Company purchased $46 million of trench DRAM products from Inotera in 2009.


Off-Balance Sheet Arrangements

Concurrent with the offering of the 1.875% Senior Notes in May 2007, the Company paid approximately $151 million for three Capped Call transactions (the “Capped Calls”).  The Capped Calls cover an aggregate of approximately 91.3 million shares of common stock.  The Capped Calls are in three equal tranches with cap prices of $17.25, $20.13 and $23.00 per share, respectively, each with an initial strike price of approximately $14.23 per share, subject to certain adjustments.  The Capped Calls expire on various dates between November 2011 and December 2012.  The Capped Calls are intended to reduce potential dilution upon conversion of the Senior Notes.

Concurrent with the offering of the 4.25% Senior Notes in April, 2009, the Company paid approximately $25 million for three capped call instruments that have an initial strike price of approximately $5.08 per share (the “2009 Capped Calls”).  The 2009 Capped Calls have a cap price of $6.64 per share and cover an aggregate of approximately 45.2 million shares of common stock.  The Capped Calls expire in October and November of 2012.  The 2009 Capped Calls are intended to reduce potential dilution upon conversion of the 4.25% Senior Notes.

(See “Item 8. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Shareholders’ Equity – Capped Call Transactions.”)



 
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Recently Adopted Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”.  Under SFAS No. 159, an entity may elect to measure many financial instruments and certain other items at fair value on an instrument by instrument basis, subject to certain restrictions.  The Company adopted SFAS No. 159 effective as of the beginning of 2009.  The Company did not elect to measure any existing items at fair value upon the adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 (as amended by subsequent FSP’s) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  The Company adopted SFAS No. 157 effective as of the beginning of 2009 for financial assets and financial liabilities.  The adoption did not have a significant impact on the Company’s financial statements.  SFAS No. 157 is also effective for all other assets and liabilities of the Company as of the beginning of 2010.  The Company does not expect the adoption to have a significant impact on its financial statements as of the adoption date.  The impact to periods subsequent to the initial adoption of SFAS No. 157 for nonfinancial assets and liabilities will depend on the nature and extent of nonfinancial assets and liabilities measured at fair value after the beginning of 2010.


Recently Issued Accounting Standards

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities .  The Company is required to adopt SFAS No. 167 as of the beginning of 2011.  The Company is evaluating the impact the adoption of SFAS No. 167 will have on its financial statements.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components of such instruments in a manner such that interest cost will be recognized at the entity’s nonconvertible debt borrowing rate in subsequent periods.  The Company is required to adopt FSP No. APB 14-1 as of the beginning of 2010.  Upon adoption, the Company will retrospectively account for its $1.3 billion of 1.875% convertible senior notes issued in May, 2007 under the provisions of FSP No. APB 14-1.  At issuance, the carrying value of the $1.3 billion convertible senior notes will be $402 million lower under FSP No. APB 14-1.  This difference of $402 million will be recognized in equity as additional capital and the carrying value of the convertible senior notes will be accreted to their face amount with a charge to interest expense over the approximate seven-year term of the notes, resulting in additional interest expense (net of the effects of capitalized interest) of $50 million, $38 million and $12 million in 2009, 2008 and 2007, respectively.  Additional interest expense will be $53 million in 2010, $57 million in 2011, $62 million in 2012, $67 million in 2013 and $54 million in 2014.  Under FSP No. APB 14-1, the carrying value of the $1.3 billion convertible senior notes will be $1,006 million at September 3, 2009.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (“SFAS No. 141(R)”), which establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase and (3) determines what information to disclose.  SFAS No. 141(R) is effective for the Company as of the beginning of 2010.  The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of business combinations occurring after the beginning of 2010.


 
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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.”  SFAS No. 160 requires that (1) noncontrolling interests be reported as a separate component of equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the statement of operations, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  SFAS No. 160 is effective for the Company as of the beginning of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which must be applied retrospectively.  As a result of the retrospective adoption, the Company’s reported total equity for 2009 and 2008 will increase by $1,986 million and $2,865 million, respectively, and its net loss for the years 2009, 2008 and 2007 will (increase) decrease by $(111) million, $(10) million and $122 million, respectively.  The effect in periods subsequent to the initial adoption will depend on the amounts and balances of noncontrolling interests as of and for those periods and the nature and extent of transactions involving changes in the Company’s noncontrolling interests after the beginning of 2010.


Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the Company believes to be reasonable under the circumstances.  Estimates and judgments may vary under different assumptions or conditions.  The Company evaluates its estimates and judgments on an ongoing basis.  Management believes the accounting policies below are critical in the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments.

Acquisitions and consolidations:   Determination and the allocation of the purchase price of acquired operations significantly influences the period in which costs are recognized.  Accounting for acquisitions and consolidations requires the Company to estimate the fair value of the individual assets and liabilities acquired as well as various forms of consideration given, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized.  The Company typically obtains independent third party valuation studies to assist in determining fair values, including assistance in determining future cash flows, appropriate discount rates and comparable market values.  Determining whether or not to consolidate a variable interest entity may require judgment in assessing whether the Company is the entity’s primary beneficiary.

Contingencies:   The Company is subject to the possibility of losses from various contingencies.  Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies.  An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.  The Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date.

Goodwill and intangible assets:   The Company tests goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate (including declines in selling prices for products) or a decision to sell or dispose of a reporting unit.  Goodwill is tested for impairment using a two-step process.  In the first step, the fair value of each reporting unit is compared to the carrying value of the net assets assigned to the unit.  If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired.  If the carrying value of the reporting unit exceeds its fair value, then the second step of the impairment test must be performed in order to determine the implied fair value of the reporting unit’s goodwill.  Determining the implied fair value of goodwill requires valuation of all of the Company’s tangible and intangible assets and liabilities.  If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.


 
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Determining when to test for impairment, the Company’s reporting units, the fair value of a reporting unit and the fair value of assets and liabilities within a reporting unit, requires judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables.  The Company bases fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.  In addition, judgments and assumptions are required to allocate assets and liabilities to reporting units.  In the second quarter of 2009, the Company wrote off all $58 million of its goodwill related to the Imaging segment based on the results of its test for impairment.  In the second quarter of 2008, the Company wrote off all $463 million of its goodwill relating to its Memory segment based on the results of its test for impairment.

The Company tests other identified intangible assets with definite useful lives and subject to amortization when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.  The Company tests intangible assets with indefinite lives annually for impairment using a fair value method such as discounted cash flows.  Estimating fair values involves significant assumptions, especially regarding future sales prices, sales volumes, costs and discount rates.

Income taxes:   The Company is required to estimate its provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world.  Estimates involve interpretations of regulations and are inherently complex.  Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year.  The Company is also required to evaluate the realizability of its deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets.  Realization of deferred tax assets is dependent on the Company’s ability to generate future taxable income.

Inventories:   Inventories are stated at the lower of average cost or market value and the Company recorded charges of $603 million in aggregate for 2009 and $282 million in aggregate for 2008, to write down the carrying value of inventories of memory products to their estimated market values.  Cost includes labor, material and overhead costs, including product and process technology costs.  Determining market value of inventories involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories.  To project average selling prices and sales volumes, the Company reviews recent sales volumes, existing customer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic trends and other information.  When these analyses reflect estimated market values below the Company’s manufacturing costs, the Company records a charge to cost of goods sold in advance of when the inventory is actually sold.  Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded.  For example, a 5% variance in the estimated selling prices would have changed the estimated market value of the Company’s semiconductor memory inventory by approximately $75 million at September 3, 2009.  Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and, as a result, the timing of when product costs are charged to operations can vary significantly.

U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values.  The amount of any inventory write-down can vary significantly depending on the determination of inventory categories.  The Company’s inventories have been categorized as Memory products or Imaging products.  The major characteristics the Company considers in determining inventory categories are product type and markets.

Product and process technology:   Costs incurred to acquire product and process technology or to patent technology developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years.  The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent of patents filed.  Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life of the technology, (ii) the patent term or (iii) the term of the technology agreement.


 
40

 

Property, plant and equipment:   The Company reviews the carrying value of property, plant and equipment for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets.  The estimation of future cash flows involves numerous assumptions which require judgment by the Company, including, but not limited to, future use of the assets for Company operations versus sale or disposal of the assets, future selling prices for the Company’s products and future production and sales volumes.  In addition, judgment is required by the Company in determining the groups of assets for which impairment tests are separately performed.

Research and development:   Costs related to the conceptual formulation and design of products and processes are expensed as research and development as incurred.  Determining when product development is complete requires judgment by the Company.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability.  Subsequent to product qualification, product costs are valued in inventory.

Stock-based compensation:   Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award.  For stock-based compensation awards with graded vesting that were granted after 2005, the Company recognizes compensation expense using the straight-line amortization method.  For performance-based stock awards, the expense recognized is dependent on the probability of the performance measure being achieved.  The Company utilizes forecasts of future performance to assess these probabilities and this assessment requires considerable judgment.

Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates.  The Company develops its estimates based on historical data and market information which can change significantly over time.  A small change in the estimates used can result in a relatively large change in the estimated valuation.  The Company uses the Black-Scholes option valuation model to value employee stock awards.  The Company estimates stock price volatility based on an average of its historical volatility and the implied volatility derived from traded options on the Company’s stock.



 
41

 

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As of September 3, 2009, $2,359 million of the Company’s $3,098 million of debt was at fixed interest rates.  As a result, the fair value of the debt fluctuates based on changes in market interest rates.  The estimated fair value of the Company’s debt was $2,868 million as of September 3, 2009 and was $2,167 million as of August 28, 2008.  The Company estimates that as of September 3, 2009, a 1% decrease in market interest rates would change the fair value of the fixed-rate debt by approximately $55 million.  As of September 3, 2009, $739 million of the Company’s debt was at variable interest rates and an increase of 1% would increase annual interest expense by approximately $8 million.

Foreign Currency Exchange Rate Risk

The information in this section should be read in conjunction with the information related to changes in the exchange rates of foreign currency in “Item 1A. Risk Factors.”  Changes in foreign currency exchange rates could materially adversely affect the Company’s results of operations or financial condition.

The functional currency for substantially all of the Company’s operations is the U.S. dollar.  The Company held cash and other assets in foreign currencies valued at an aggregate of U.S. $229 million as of September 3, 2009 and U.S. $425 million as of August 28, 2008.  The Company also had foreign currency liabilities valued at an aggregate of U.S. $742 million as of September 3, 2009, and U.S. $580 million as of August 28, 2008.  Significant components of the Company’s assets and liabilities denominated in foreign currencies were as follows (in U.S. dollar equivalents):

   
2009
   
2008
 
   
Singapore Dollars
   
Yen
   
Euro
   
Singapore Dollars
   
Yen
   
Euro
 
   
(in millions)
 
                                     
Cash and equivalents
  $ 7     $ 8     $ 21     $ 84     $ 130     $ 25  
Net deferred tax assets
    --       115       1       --       85       2  
Accounts payable and accrued expenses
    (68 )     (141 )     (99 )     (105 )     (127 )     (61 )
Debt
    (289 )     (25 )     (4 )     (49 )     (108 )     (4 )
Other liabilities
    (6 )     (54 )     (38 )     (8 )     (45 )     (43 )

The Company estimates that, based on its assets and liabilities denominated in currencies other than the U.S. dollar as of September 3, 2009, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately U.S. $3 million for the Singapore dollar and U.S. $1 million for euro and the yen.  Historically, the Company has not used derivative instruments to hedge its foreign currency exchange rate risk.

 
42

 

Item 8.   Financial Statements and Supplementary Data


Index to Consolidated Financial Statements

 
Page
   
Consolidated Financial Statements as of September 3, 2009 and August 28, 2008 and for the fiscal years ended September 3, 2009, August 28, 2008 and August 30, 2007:
 
   
Consolidated Statements of Operations
44
   
Consolidated Balance Sheets
45
   
Consolidated Statements of Shareholders’ Equity
46
   
Consolidated Statements of Cash Flows
47
   
Notes to Consolidated Financial Statements
48
   
Report of Independent Registered Public Accounting Firm
77
   
Financial Statement Schedule:
 
   
Schedule II – Valuation and Qualifying Accounts
84


 
43

 

MICRON TECHNOLOGY, INC.

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

 
For the year ended
 
September 3,
2009
   
August 28,
2008
   
August 30,
2007
 
                   
Net sales
  $ 4,803     $ 5,841     $ 5,688  
Cost of goods sold
    5,242       5,896       4,610  
Gross margin
    (439 )     (55 )     1,078  
                         
Selling, general and administrative
    354       455       610  
Research and development
    647       680       805  
Restructure
    70       33       19  
Goodwill impairment
    58       463       --  
Other operating (income) expense, net
    107       (91 )     (76 )
Operating loss
    (1,675 )     (1,595 )     (280 )
                         
Interest income
    22       79       143  
Interest expense
    (135 )     (82 )     (40 )
Other non-operating income (expense), net
    (16 )     (13 )     9  
      (1,804 )     (1,611 )     (168 )
                         
Income tax (provision)
    (2 )     (18 )     (30 )
Equity in net losses of equity method investees, net of tax
    (140 )     --       --  
Noncontrolling interests in net (income) loss
    111       10       (122 )
Net loss
  $ (1,835 )   $ (1,619 )   $ (320 )
                         
Loss per share:
                       
Basic
  $ (2.29 )   $ (2.10 )   $ (0.42 )
Diluted
    (2.29 )     (2.10 )     (0.42 )
                         
Number of shares used in per share calculations:
                       
Basic
    800.7       772.5       769.1  
Diluted
    800.7       772.5       769.1  

 


See accompanying notes to consolidated financial statements.

 
44

 

MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)

 
As of
 
September 3,
2009
   
August 28,
2008
 
             
Assets
           
Cash and equivalents
  $ 1,485     $ 1,243  
Short-term investments
    --       119  
Receivables
    798       1,032  
Inventories
    987       1,291  
Other current assets
    74       94  
Total current assets
    3,344       3,779  
Intangible assets, net
    344       364  
Property, plant and equipment, net
    7,081       8,811  
Equity method investments
    315       84  
Other assets
    371       392  
Total assets
  $ 11,455     $ 13,430  
                 
Liabilities and shareholders’ equity
               
Accounts payable and accrued expenses
  $ 1,037     $ 1,111  
Deferred income
    209       114  
Equipment purchase contracts
    222       98  
Current portion of long-term debt
    424       275  
Total current liabilities
    1,892       1,598  
Long-term debt
    2,674       2,451  
Other liabilities
    249       338  
Total liabilities
    4,815       4,387  
                 
Commitments and contingencies
               
                 
Noncontrolling interests in subsidiaries
    1,986       2,865  
                 
Common stock, $0.10 par value, authorized 3,000 shares, issued and outstanding 848.7 million and 761.1 million shares, respectively
     85        76  
Additional capital
    6,863       6,566  
Accumulated deficit
    (2,291 )     (456 )
Accumulated other comprehensive (loss)
    (3 )     (8 )
Total shareholders’ equity
    4,654       6,178  
Total liabilities and shareholders’ equity
  $ 11,455     $ 13,430  

 



See accompanying notes to consolidated financial statements.

 
45

 

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)

 
   
Common Stock
               
 
   
 
 
   
Number
of Shares
   
Amount
   
Additional Capital
   
Retained Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’ Equity
 
                                     
Balance at August 31, 2006
    749.4     $ 75     $ 6,555     $ 1,486     $ (2 )   $ 8,114  
                                                 
Net loss
                            (320 )             (320 )
Stock issued under stock plans
    8.7       1       73                       74  
Stock-based compensation expense
                    44                       44  
Repurchase and retirement of common stock
    (0.2 )             (2 )     (2 )             (4 )
Adjustment to initially apply SFAS No. 158, net of tax benefit of $3
                                    (5 )     (5 )
Purchase of capped calls
                    (151 )                     (151 )
Balance at August 30, 2007
    757.9     $ 76     $ 6,519     $ 1,164     $ (7 )   $ 7,752  
                                                 
Comprehensive income (loss):
                                               
Net loss
                            (1,619 )             (1,619 )
Other comprehensive income (loss):
                                               
Net change in unrealized gain (loss) on investments, net of tax
                                    (1 )     (1 )
Total comprehensive income (loss)
                                            (1,620 )
                                                 
Stock issued under stock plans
    3.7               3                       3  
Stock-based compensation expense
                    48                       48  
Adoption of FIN 48
                            (1 )             (1 )
Repurchase and retirement of common stock
    (0.5 )             (4 )                     (4 )
Balance at August 28, 2008
    761.1     $ 76     $ 6,566     $ (456 )   $ (8 )   $ 6,178  
                                                 
Comprehensive income (loss):
                                               
Net loss
                            (1,835 )             (1,835 )
Other comprehensive income (loss):
                                               
Net change in unrealized gain (loss) on investments, net of tax
                                    13       13  
Net change in cumulative translation adjustment, net of tax
                                    (9 )     (9 )
Pension liability adjustment, net of tax
                                    1       1  
Total comprehensive income (loss)
                                            (1,830 )
                                                 
Stock issued under stock plans
    4.0       1                               1  
Stock-based compensation expense
                    44                       44  
Repurchase and retirement of common stock
    (0.5 )             (2 )               <