Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 07/13/2010 16:16:00)






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

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 3, 2010

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

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

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

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

The number of outstanding shares of the registrant’s common stock as of July 8, 2010 was 994,171,461.
 
 



 
 

 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

MICRON TECHNOLOGY, INC.

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

   
Quarter Ended
   
Nine Months Ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
                         
Net sales
  $ 2,288     $ 1,106     $ 5,989     $ 3,501  
Cost of goods sold
    1,440       999       4,056       4,110  
Gross margin
    848       107       1,933       (609 )
                                 
Selling, general and administrative
    190       80       387       272  
Research and development
    142       162       427       508  
Restructure
    (5 )     19       (7 )     58  
Goodwill impairment
    --       --       --       58  
Other operating (income) expense, net
    (19 )     92       (30 )     122  
Operating income (loss)
    540       (246 )     1,156       (1,627 )
                                 
Gain from acquisition of Numonyx
    437       --       437       --  
Interest income
    4       6       8       20  
Interest expense
    (44 )     (49 )     (137 )     (137 )
Other non-operating income (expense), net
    1       (4 )     56       (15 )
      938       (293 )     1,520       (1,759 )
                                 
Income tax (provision) benefit
    41       4       44       (14 )
Equity in net income (losses) of equity method investees, net of tax
    (19 )     (45 )     (23 )     (106 )
Net income (loss)
    960       (334 )     1,541       (1,879 )
                                 
Net (income) loss attributable to noncontrolling interests
    (21 )     33       (33 )     97  
Net income (loss) attributable to Micron
  $ 939     $ (301 )   $ 1,508     $ (1,782 )
                                 
Earnings (loss) per share:
                               
Basic
  $ 1.06     $ (0.37 )   $ 1.75     $ (2.27 )
Diluted
    0.92       (0.37 )     1.55       (2.27 )
                                 
Number of shares used in per share calculations:
                               
Basic
    885.4       813.3       860.0       786.5  
Diluted
    1,049.4       813.3       1,019.7       786.5  

 

 


See accompanying notes to consolidated financial statements.

 
1

 

MICRON TECHNOLOGY, INC.
 

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

 
As of
 
June 3,
2010
   
September 3,
2009
 
             
Assets
           
Cash and equivalents
  $ 2,313     $ 1,485  
Receivables
    1,568       798  
Inventories
    1,747       987  
Other current assets
    96       74  
Total current assets
    5,724       3,344  
Intangible assets, net
    341       344  
Property, plant and equipment, net
    6,635       7,089  
Equity method investments
    1,010       315  
Other noncurrent assets
    667       367  
Total assets
  $ 14,377     $ 11,459  
                 
Liabilities and equity
               
Accounts payable and accrued expenses
  $ 1,492     $ 1,037  
Deferred income
    244       209  
Equipment purchase contracts
    223       222  
Current portion of long-term debt
    652       424  
Total current liabilities
    2,611       1,892  
Long-term debt
    1,717       2,379  
Other noncurrent liabilities
    582       249  
Total liabilities
    4,910       4,520  
                 
Commitments and contingencies
               
                 
Micron shareholders’ equity:
               
Common stock, $0.10 par value, authorized 3,000 million shares, issued and outstanding 993.9 million and 848.7 million shares, respectively
    99       85  
Additional capital
    8,441       7,257  
Accumulated deficit
    (877 )     (2,385 )
Accumulated other comprehensive income (loss)
    17       (4 )
Total Micron shareholders’ equity
    7,680       4,953  
Noncontrolling interests in subsidiaries
    1,787       1,986  
Total equity
    9,467       6,939  
Total liabilities and equity
  $ 14,377     $ 11,459  


 


See accompanying notes to consolidated financial statements.

 
2

 

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine months ended
 
June 3,
2010
   
June 4,
2009
 
             
Cash flows from operating activities
           
Net income (loss)
  $ 1,541     $ (1,879 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    1,474       1,683  
Stock-based compensation
    73       34  
Equity in net losses of equity method investees
    23       106  
Provision to write down inventories to estimated market values
    16       603  
Gain from acquisition of Numonyx
    (437 )     --  
Gain from Inotera stock issuance
    (56 )     --  
Noncash restructure charges (credits)
    (14 )     157  
(Gain) loss from disposition of property, plant and equipment, net
    (10 )     55  
Goodwill impairment
    --       58  
Loss on write-down of Aptina imaging assets
    --       53  
Change in operating assets and liabilities:
               
(Increase) decrease in receivables
    (556 )     224  
Increase in inventories
    (88 )     (311 )
Increase (decrease) in accounts payable and accrued expenses
    165       (6 )
Decrease in customer prepayments
    (143 )     (44 )
Increase in deferred income
    28       71  
Other
    3       45  
Net cash provided by operating activities
    2,019       849  
                 
Cash flows from investing activities
               
Expenditures for property, plant and equipment
    (269 )     (439 )
Acquisitions of equity method investments
    (151 )     (408 )
Cash acquired from acquisition of Numonyx
    95       --  
Proceeds from sales of property, plant and equipment
    86       13  
(Increase) decrease in restricted cash
    10       (57 )
Proceeds from maturities of available-for-sale securities
    --       130  
Other
    10       80  
Net cash used for investing activities
    (219 )     (681 )
                 
Cash flows from financing activities
               
Repayments of debt
    (748 )     (373 )
Distributions to noncontrolling interests
    (244 )     (592 )
Payments on equipment purchase contracts
    (199 )     (127 )
Proceeds from debt
    200       716  
Cash received from noncontrolling interests
    24       24  
Proceeds from issuance of common stock, net of costs
    7       276  
Other
    (12 )     (29 )
Net cash used for financing activities
    (972 )     (105 )
                 
Net increase in cash and equivalents
    828       63  
Cash and equivalents at beginning of period
    1,485       1,243  
Cash and equivalents at end of period
  $ 2,313     $ 1,306  
                 
Supplemental disclosures
               
Income taxes refunded (paid), net
  $ 11     $ (14 )
Interest paid, net of amounts capitalized
    (85 )     (87 )
Noncash investing and financing activities:
               
Stock and restricted stock units issued in acquisition of Numonyx
    1,112       --  
Equipment acquisitions on contracts payable and capital leases
    281       305  
Acquisition of interest in Transform
    65       --  
See accompanying notes to consolidated financial statements.

 
3

 

MICRON TECHNOLOGY, INC.

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

Business and Significant Accounting Policies

Basis of presentation:   Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as the “Company”) is a global manufacturer and marketer of semiconductor devices, principally DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, embedded and mobile products.  In addition, the Company manufactures CMOS image sensors and other semiconductor products.  The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended September 3, 2009, except for changes resulting from the adoption of new accounting standards for convertible debt and noncontrolling interests.  Prior year amounts and balances have been retrospectively adjusted to reflect the adoption of these new accounting standards.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows.  (See “Adjustments for Retrospective Application of New Accounting Standards” note.)

In the third quarter of 2010, the Company added a new reportable segment as a result of the acquisition of Numonyx and has two reportable segments, Memory and Numonyx.  The Company included the former Numonyx business as a reportable segment since its acquisition on May 7, 2010.  The primary products of the Memory segment are DRAM and NAND Flash memory and the primary products of the Numonyx segment are NOR Flash, NAND Flash, DRAM and Phase Change non-volatile memory.

The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s fiscal 2010 contains 52 weeks and the third quarter and first nine months of fiscal 2010, which ended on June 3, 2010, contained 13 weeks and 39 weeks, respectively.  The Company’s fiscal 2009, which ended on September 3, 2009, contained 53 weeks and the third quarter and first nine months of fiscal 2009 contained 13 weeks and 40 weeks, respectively.  All period references are to the Company’s fiscal periods unless otherwise indicated.  These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended September 3, 2009 and in the Company’s report on Form 8-K filed on March 4, 2010.

Recently adopted accounting standards:   In May 2008, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement.  This standard requires that issuers of these types of convertible debt instruments separately account for the liability and equity components of such instruments in a manner such that interest cost is recognized at the entity’s nonconvertible debt borrowing rate in subsequent periods.  The Company adopted this standard as of the beginning of 2010 and retrospectively accounted for its $1.3 billion 1.875% convertible senior notes under the provisions of this guidance from the May 2007 issuance date of the notes.  As a result, prior financial statement amounts were recast.  (See “Adjustments for Retrospective Application of New Accounting Standards” note.)

In December 2007, the FASB issued a new accounting standard on noncontrolling interests in consolidated financial statements.  This standard 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.  The Company adopted this standard as of the beginning of 2010.  As a result, prior financial statement amounts were recast.  (See “Adjustments for Retrospective Application of New Accounting Standards” note.)


 
4

 


 
In December 2007, the FASB issued a new accounting standard on business combinations, which establishes the principles and requirements for how an acquirer (1) recognizes and measures in its financial statements identifiable assets acquired, 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.  The Company adopted this standard effective as of the beginning of 2010.  The initial adoption did not have a significant impact on the Company’s financial statements.  The acquisition of Numonyx was accounted for under the provisions of this new standard.

In September 2006, the FASB issued a new accounting standard on fair value measurements and disclosures, which 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 this standard effective as of the beginning of 2009 for financial assets and financial liabilities.  The Company adopted this standard effective as of the beginning of 2010 for all other assets and liabilities.  The adoptions did not have a significant impact on the Company’s financial statements.

Recently issued accounting standards:   In June 2009, the FASB issued a new accounting standard on variable interest entities 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 this standard as of the beginning of 2011.  The Company is evaluating the impact the adoption of this standard will have on its financial statements.


Numonyx Holdings B.V.

On May 7, 2010, the Company completed its acquisition of Numonyx Holdings B.V. (“Numonyx”), which manufactures and sells NOR Flash, NAND Flash, DRAM and Phase Change non-volatile memory technologies and products.  The Company acquired Numonyx to   further strengthen the Company’s portfolio of memory products, increase manufacturing and revenue scale, access Numonyx’s customer base and provide opportunities to increase multi-chip offerings in the embedded and mobile markets.  In connection therewith, the Company issued 137.7 million shares of the Company’s common stock in exchange for all of the outstanding Numonyx capital stock and issued 4.8 million restricted stock units to employees of Numonyx in exchange for all of their outstanding restricted stock units.  The total fair value of the consideration the Company paid for Numonyx was $1,112 million and consisted of $1,091 million for the shares issued to the Numonyx shareholders and $21 million for the restricted stock units issued to employees of Numonyx.  The fair value of the consideration was determined based on the trading price of the Company’s common shares on the acquisition date discounted for the resale restrictions on the shares.  Of the shares issued to the Numonyx shareholders, 21.0 million were placed in escrow as partial security for the Numonyx shareholders’ indemnity obligations resulting from the acquisition.  The shares in escrow may be sold after November 6, 2010, but the proceeds from any sale remain in escrow until May 7, 2011, at which time the escrow assets are payable to the Numonyx shareholders, net of any indemnification claims from the Company.  Included in the selling, general and administrative expenses in the results of operations for the third quarter and first nine months of 2010 are transaction costs of $12 million and $19 million, respectively, incurred in connection with this acquisition.

The Company provisionally determined the assets and liabilities of Numonyx based on fair values as of May 7, 2010 utilizing an in-exchange model.  Because the purchase price was less than the fair value of net assets of Numonyx, the Company recognized a preliminary gain on the acquisition of $437 million.  The Company believes the gain realized in acquisition accounting was the result of a number of factors, including the following: significant losses recognized by Numonyx during the recent downturn in the semiconductor memory industry; substantial volatility in Numonyx’s primary markets; market perceptions that future opportunities for Numonyx products in certain markets are limited; the liquidity afforded to the sellers as a result of the limited opportunities to realize the value of their investment in Numonyx; and potential gains to the sellers through their investment in the Company’s equity from synergies between Numonyx and the Company.  The consideration and provisional valuation of assets acquired and liabilities assumed were as follows:

 
5

 
 
Consideration:
     
Fair value of common stock issued
  $ 1,091  
Fair value of restricted stock units issued
    21  
    $ 1,112  
         
Recognized amounts of identifiable assets acquired and liabilities assumed:
       
Cash and equivalents
  $ 95  
Receivables
    256  
Inventories
    689  
Other current assets
    28  
Intangible assets
    29  
Property, plant and equipment
    344  
Equity method investment
    414  
Other noncurrent assets
    307  
         
Accounts payable and accrued expenses
    (310 )
Other current liabilities
    (5 )
Other noncurrent liabilities
    (298 )
Total net assets acquired
    1,549  
Gain on acquisition
    (437 )
    $ 1,112  

Other noncurrent liabilities in the table above include contingent liabilities of $66 million for uncertain tax positions (a significant portion for which the Company has recorded an indemnification asset in other noncurrent assets in the table above) and $15 million for the Company’s obligation, subject to certain conditions, to guarantee certain debt of Hynix-Numonyx Semiconductor Ltd., an acquired equity method investment.  These amounts were estimated based on the present value of probability-weighted cash flows. The Company’s results of operations for the third quarter and first nine months of 2010 include $80 million of net sales and $21 million of operating losses from the Numonyx operations after the May 7, 2010 acquisition date.  (See “Equity Method Investments – Hynix JV” note.)

The following unaudited pro forma financial information presents the combined results of operations of the Company and Numonyx as if the companies were combined as of the beginning of 2009.  The pro forma financial information includes the accounting affects of the business combination, including the adjustment of amortization of intangible assets, depreciation of property, plant and equipment, interest expense and elimination of intercompany sales, as if the companies were actually combined as of the beginning of 2009.  The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the companies been combined as of the beginning of 2009.

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Net sales
  $ 2,781     $ 1,447     $ 7,489     $ 4,873  
Net income (loss)
    987       (402 )     1,538       (2,045 )
Net income (loss) attributable to Micron
    966       (368 )     1,505       (1,948 )
Earnings (loss) per share:
                               
Basic
  $ 0.98     $ (0.40 )   $ 1.53     $ (2.16 )
Diluted
    0.86       (0.40 )     1.38       (2.16 )

The unaudited pro forma financial information for the three and nine month periods ended June 3, 2010 includes the results of the Company for the periods ended June 3, 2010 and the results of Numonyx, including the adjustments described above, for the three and nine month periods ended March 27, 2010.  The three and nine month periods ended June 4, 2009 includes the results of the Company for the periods ended June 4, 2009 and the results of Numonyx, including the adjustments described above, for the three and nine month periods ended March 28, 2009.


 
6

 


 
Supplemental Balance Sheet Information

Receivables
 
June 3,
2010
   
September 3,
2009
 
             
Trade receivables (net of allowance for doubtful accounts of $5 million and $5 million, respectively)
  $ 1,237     $ 591  
Income and other taxes receivable
    117       49  
Related party receivables
    65       70  
Other
    149       88  
    $ 1,568     $ 798  

As of June 3, 2010, related party receivables included $60 million due from Aptina Imaging Corporation (“Aptina”) under a wafer supply agreement for image sensor products, $3 million due from Inotera Memories, Inc. (“Inotera”) for reimbursement of expenses incurred under a technology transfer and cost sharing agreement and $2 million due from Transform Solar Pty Limited for transition services and photovoltaic product development activities.  As of September 3, 2009, related party receivables included $69 million due from Aptina under a wafer supply agreement for image sensor products and $1 million due from Inotera for reimbursement of expenses incurred under a technology transfer agreement.

As of June 3, 2010 and September 3, 2009, other receivables included $30 million and $29 million, respectively, due from Intel Corporation (“Intel”) for amounts related to NAND Flash product design and process development activities.

Inventories
 
June 3,
2010
   
September 3,
2009
 
             
Finished goods
  $ 475     $ 233  
Work in process
    1,161       649  
Raw materials and supplies
    111       105  
    $ 1,747     $ 987  

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.

Intangible Assets
                       
                         
   
June 3, 2010
   
September 3, 2009
 
   
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
                         
Product and process technology
  $ 420     $ (171 )   $ 439     $ (181 )
Customer relationships
    127       (62 )     127       (50 )
Other
    51       (24 )     28       (19 )
    $ 598     $ (257 )   $ 594     $ (250 )

During the first nine months of 2010 and 2009, the Company capitalized $27 million and $82 million, respectively, for product and process technology with weighted-average useful lives of 9 years.  In addition, in connection with the acquisition of Numonyx, the Company recorded other intangible assets of $29 million related to a supply agreement, which is being amortized through the expected remaining term of the agreement of August 2010.  (See “Numonyx Holdings B.V.” note.)

Amortization expense for intangible assets was $23 million and $57 million for the third quarter and first nine months of 2010, respectively, and $18 million and $58 million for the third quarter and first nine months of 2009, respectively.  Annual amortization expense for intangible assets is estimated to be $96 million for 2010, $65 million for 2011, $57 million for 2012, $53 million for 2013 and $45 million for 2014.

 
7

 


 
Property, Plant and Equipment
 
June 3,
2010
   
September 3,
2009
 
             
Land
  $ 95     $ 96  
Buildings
    4,391       4,473  
Equipment
    12,630       11,834  
Construction in progress
    62       47  
Software
    269       268  
      17,447       16,718  
Accumulated depreciation
    (10,812 )     (9,629 )
    $ 6,635     $ 7,089  

Depreciation expense was $453 million and $1,356 million for the third quarter and first nine months of 2010, respectively, and $488 million and $1,572 million for the third quarter and first nine months of 2009, respectively.

The Company, through its IM Flash joint venture, has an unequipped wafer fabrication facility in Singapore that was completed in the first quarter of 2009 but had been idle through the first quarter of 2010.  The Company has been recording depreciation expense for the facility since its completion and its net book value was $605 million as of June 3, 2010.  In the second quarter of 2010, IM Flash began moving forward with start-up activities at the Singapore wafer fabrication facility, including placing purchase orders and preparing the facility for tool installations expected to commence in 2011.

As of June 3, 2010 and September 3, 2009, other noncurrent assets included $137 million and $81 million, respectively, for buildings, equipment and related assets classified as held for sale.  Assets held for sale as of June 3, 2010 include a facility in Catania, Italy acquired in connection with the Numonyx acquisition.  In July 2010, the Company transferred title to the Catania facility to STMicroelectronics N.V. in exchange for consideration of $78 million.

Goodwill

In the second quarter of 2009, the Company’s imaging operations (the primary component of All Other segment) experienced a severe decline in sales, margins and profitability due to a significant decline in demand 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 operations and its competitors experienced significant declines in market value.  Accordingly, in the second quarter of 2009, the Company performed an assessment of its imaging operations segment goodwill for impairment.  Based on this assessment, the Company wrote off all of the $58 million of goodwill associated with its imaging operations as of March 5, 2009.

Equity Method Investments
                       
                         
   
June 3, 2010
   
September 3, 2009
 
   
Carrying Value
   
Ownership Percentage
   
Carrying Value
   
Ownership Percentage
 
                         
Inotera
  $ 442       29.9 %   $ 229       29.8 %
MeiYa
    45       50.0 %     42       50.0 %
Hynix JV
    417       20.7 %     --       --  
Transform
    74       50.0 %     --       --  
Aptina
    32       35.0 %     44       35.0 %
    $ 1,010             $ 315          

The Company has partnered with Nanya Technology Corporation (“Nanya”) in two Taiwan DRAM memory companies, Inotera Memories, Inc. (“Inotera”) and MeiYa Technology Corporation (“MeiYa”), which are accounted for by the Company as equity method investments.  In connection with the Numonyx acquisition on May 7, 2010, the Company acquired an equity method investment in Hynix-Numonyx Semiconductor Ltd. (the “Hynix JV”), a manufacturer of semiconductor memory products.  Additionally, the Company has equity method investments in Aptina Imaging Corporation (“Aptina”), a CMOS imaging company, and in Transform Solar Pty Limited (“Transform”), a joint venture to develop and manufacture photovoltaic products.


 
8

 


 
DRAM joint ventures with Nanya:   The Company has a partnering arrangement with Nanya pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products.  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.  The Company recognized $13 million and $65 million of license revenue from this arrangement during the third quarter and first nine months of 2010, respectively, and recognized $25 million and $79 million during the third quarter and first nine months of 2009, respectively.  The Company has recognized $207 million of cumulative license revenue from this arrangement from May 2008 through April 2010.  Under a cost sharing arrangement effective in April, 2010, the Company and Nanya began sharing equally in DRAM development costs and the Company’s research and development costs were reduced by $24 million in the third quarter of 2010 due to this cost sharing agreement.  In addition, in the third quarter of 2010, the Company received $2 million of royalties from Nanya for sales of stack DRAM products manufactured by or for Nanya on process nodes of 50nm or higher and will continue to receive royalties from Nanya associated with previously developed technology.

The Company has concluded that both Inotera and MeiYa are variable interest entities because of the Inotera and MeiYa supply agreements with the Company and Nanya.  Nanya and the Company are considered related parties under the accounting standards for consolidating variable interest entities.  The Company reviewed several factors to determine whether it is the primary beneficiary of Inotera and MeiYa, including the size and nature of the entities’ operations relative to Nanya and the Company, the nature of day-to-day operations and certain other factors.  Based on those factors, the Company determined that Nanya is more closely associated with, and therefore the primary beneficiary of, Inotera and MeiYa.  The Company accounts for its interests using the equity method of accounting and does not consolidate these entities.  The Company recognizes its share of earnings or losses from these entities on a two-month lag.

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”).  On August 3, 2009, Inotera sold 640 million common shares in a public offering at a price equal to 16.02 New Taiwan dollars per common share (approximately $0.49 U.S. dollars on August 3, 2009).  As a result of the share issuance, the Company’s equity interest in Inotera decreased from 35.5% to 29.8% and the Company recognized a gain of $56 million in the first quarter of 2010.  On February 6, 2010, as part of another offering of 640 million common shares, the Company and Nanya each paid $138 million to purchase approximately 196 million shares each, slightly increasing the Company’s equity interest in Inotera from 29.8% to 29.9%.  As of June 3, 2010, the ownership of Inotera was held 30.0% by Nanya, 29.9% by the Company and the balance was publicly held.

The Company’s carrying value of its initial investment in Inotera is less than its proportionate share of Inotera’s equity.  This difference is being amortized as a credit to earnings in the Company’s statement of operations through equity in net income (losses) of equity method investees (the “Inotera Amortization”).  The Company’s results of operations for the third quarter and first nine months of 2010 include $14 million and $38 million, respectively, of Inotera Amortization and its results of operations for the third quarter and first nine months of 2009 include $15 million and $23 million, respectively, of Inotera Amortization.  During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement and, in connection therewith, recognized $3 million and $13 million of revenue in the third quarter and first nine months of 2010, respectively.  The $56 million gain recognized in the first quarter of 2010 on Inotera’s issuance of shares included $33 million of accelerated Inotera Amortization.  As of June 3, 2010, $138 million of Inotera Amortization remained to be recognized over a weighted-average period of 4 years.

In connection with the Company’s initial acquisition of 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 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.  The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity.  In the third quarter and first nine months of 2010, the Company purchased $188 million and $543 million, respectively, of DRAM products (substantially all of which were trench technologies) from Inotera under the Inotera Supply Agreement.

During the second quarter of 2009, Qimonda filed for bankruptcy and defaulted on its obligations to purchase trench DRAM products from Inotera under a separate supply agreement between Inotera and Qimonda (“the Qimonda Supply Agreement”).  Pursuant to the Company’s obligations 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 the Qimonda Supply Agreement.  As a result, the Company recorded $14 million and $65 million in cost of goods sold in the third quarter and first nine months of 2009 for its obligations to Inotera as a result of Qimonda’s default.

 
9

 


The Company’s results of operations for the third quarter and first nine months of 2010 include losses of $4 million and $3 million, respectively, and its results of operations for the third quarter and first nine months of 2009 include losses of $43 million and $99 million, respectively, from its equity interest in Inotera.

The Company recorded gains (losses) to other comprehensive income (loss) for translation adjustments on its investment in Inotera of $7 million and $17 million for the third quarter and first nine months of 2010, respectively, and $(19) million and $(18) million for the third quarter and first nine months of 2009, respectively.  As of June 3, 2010, there was a gain of $14 million in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheet for cumulative translation adjustments on the Company’s equity interest in Inotera.  Based on the closing trading price of Inotera’s shares in an active market on June 3, 2010, the market value of the Company’s equity interest in Inotera was $819 million.

As of June 3, 2010, the Company’s maximum exposure to loss on its equity interest in Inotera equaled the $428 million recorded in the consolidated balance sheet for its investment in Inotera (which includes the $14 million gain in accumulated other comprehensive income (loss)).  The Company may also incur losses in connection with its obligations under the Inotera Supply Agreement to purchase up to 50% of Inotera’s wafer production under a long-term pricing arrangement.

MeiYa :   The Company and Nanya formed MeiYa in the fourth quarter of 2008.  In connection with the acquisition of its equity interest in Inotera, the Company entered into a series of agreements with Nanya pursuant to which both parties ceased future funding of, and resource commitments to, MeiYa.  In addition, MeiYa has sold substantially all of its assets to Inotera.  As of June 3, 2010, the ownership of MeiYa was held 50% by Nanya and 50% by the Company.  The Company’s results of operations for the third quarter and first nine months of 2010 include gains of $1 million and its results of operations for the third quarter and first nine months of 2009 include losses of $2 million and $7 million, respectively, from its equity interest in MeiYa.  The Company recorded gains (losses) to other comprehensive income (loss) for translation adjustments on its investment in MeiYa of $1 million and $2 million for the third quarter and first nine months of 2010, respectively, and $(3) million and $(8) million for the third quarter and first nine months of 2009, respectively.  As of June 3, 2010, there was $(4) million in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheet for cumulative translation adjustments on the Company’s equity interest in MeiYa.

As of June 3, 2010, the Company’s maximum exposure to loss on its MeiYa equity interest equaled the $49 million recorded in the Company’s consolidated balance sheet for its investment in MeiYa (which includes the $(4) million loss in accumulated other comprehensive income (loss)).

Hynix JV: In connection with the Company’s acquisition of Numonyx, the Company acquired a 20.7% noncontrolling interest in Hynix-Numonyx Semiconductor Ltd. (the “Hynix JV”), a joint venture with Hynix Semiconductor, Inc. (“Hynix”) and Hynix Semiconductor (WUXI) Limited.  The Hynix JV was formed pursuant to a joint venture agreement originally entered into between STMicroelectronics N.V. (“ST”) and Hynix prior to the formation of Numonyx (as amended and restated, the “JV Agreement”).  (See “Numonyx Holdings B.V.” note.)

Under the terms of the JV Agreement, the change in control of Numonyx due to its acquisition by the Company gave rise to certain rights of the parties to the JV Agreement to buy or sell or cause the other party to buy or sell their equity interests in the Hynix JV, including the right of Hynix to purchase all of the Company’s equity interest in the Hynix JV (the “Hynix Call Option”).  Pursuant to the JV Agreement, the exercise price of the Hynix Call Option is an amount equal to the positive difference between the book value of the Hynix JV’s total assets and the book value of the Hynix JV’s total liabilities, multiplied by the Company’s percentage ownership in the Hynix JV, estimated to be approximately $425 million.  On May 28, 2010, Hynix gave notice to the Company of its exercise of the Hynix Call Option to acquire the Company’s 20.7% interest in the Hynix JV, subject to regulatory approval.  The consummation of the equity transfer is expected to take place prior to the end of the first quarter of fiscal 2011.

Hynix   JV Supply Agreement :   Pursuant to the terms of a supply agreement with the Hynix JV, the Company purchased $29 million of memory products from the Hynix JV in the third quarter of 2010.  The Hynix JV is permitted to terminate the supply agreement upon exercise of the Hynix Call Option and the consummation of the equity transfer.  On May 28, 2010, the Hynix JV delivered notice to the Company of its intent to terminate the JV supply agreement concurrent with the consummation of the equity transfer.  A significant portion of Numonyx’s net sales is dependent upon sales of products supplied to it by the Hynix JV pursuant to the JV supply agreement.  The Company and the Hynix JV are currently in discussions to enter into a new supply agreement.  If the parties are unable to reach agreement and the JV supply agreement is terminated, the Hynix JV will have no further supply obligations to the Company.


 
10

 


 
DBS Loan Arrangements :   Concurrent with the completion of the Company’s acquisition of Numonyx, the Company and ST entered into a framework agreement (the “Framework Agreement”) that provides that the Company is required to take certain actions in connection with an outstanding $250 million loan (the “Loan”), due in periodic installments from 2014 through 2016, made by DBS Bank Ltd. (“DBS”) to the Hynix JV.  In particular, the Company has agreed that, subject to certain conditions, within two business days after receipt of the proceeds from the equity transfer, it will deposit $250 million of such proceeds into a pledged account at DBS.  The funds deposited into such account will collateralize the Company’s obligations under a guarantee of the Loan, which guarantee is to be entered into by the Company concurrent with such deposit.  The amount on deposit in the DBS account will be accounted for as restricted cash in other noncurrent assets in the accompanying consolidated balance sheet.  The amount on deposit and the Company’s guarantee decrease as payments are made by the Hynix JV against the Loan.  As of June 3, 2010, other noncurrent liabilities included $15 million for the fair value of the Company’s obligations under the Framework Agreement.

Transform:   On December 18, 2009, the Company acquired a 50% interest in Transform, a subsidiary of Origin Energy Limited (“Origin”), which is a public company in Australia.  In exchange for its equity interest in Transform, the Company contributed nonmonetary assets from its Memory segment with a fair value of $65 million, consisting of manufacturing facilities, equipment, intellectual property and a fully-paid lease to a portion of its Boise, Idaho manufacturing facilities.  The carrying value of the nonmonetary assets was approximately equal to the fair value of the Company’s equity interest in Transform and no gain or loss was recognized on the contribution.  As of June 3, 2010, the ownership of Transform was held 50% by the Company and 50% by Origin.  During the second quarter and third quarter of 2010, the Company and Origin each contributed $5 million and $8 million, respectively, of cash to Transform.  The Company recognizes its share of earnings or losses from Transform on a two-month lag.

The Company’ carrying value of its equity interest in Transform exceeds its proportionate share of Transform’s equity.  This difference is being amortized as a charge to earnings in the Company’s statement of operations through equity in net income (losses) of equity method investees (the “Transform Amortization”).  As of June 3, 2010, $28 million of Transform Amortization remained to be recognized over a weighted-average period of 7 years.

The Company’s results of operations for the third quarter of 2010 include losses of $6 million from its equity interest in Transform.  The Company’s results of operations for the first nine months of 2010 include $9 million of net sales, which approximates its cost, for transition services provided to Transform.

As of June 3, 2010, other noncurrent assets included $34 million for the manufacturing facilities leased to Transform and liabilities included $34 million for deferred rent revenue on the fully-paid lease.  Additionally, as of June 3, 2010, other noncurrent assets and liabilities included $6 million for the value of certain equipment and intangible assets, which the Company was obligated to contribute to Transform.

The Company has concluded that Transform is a variable interest entity because the Company’s equity investment at risk is not sufficient to permit Transform to finance its activities without additional subordinated financial support from its investors.  Origin and the Company are considered related parties under the accounting standards for consolidating variable interest entities.  The Company reviewed several factors to determine whether it is the primary beneficiary of Transform, including the relationships and significance of Transform’s activities and operations relative to Origin and the Company and certain other factors.  Based on those factors, the Company determined that Origin is more closely associated with, and therefore the primary beneficiary of, Transform.  The Company accounts for its interest using the equity method of accounting and does not consolidate the entity.

As of June 3, 2010, the Company’s maximum exposure loss on its equity interest in Transform equaled $74 million.

Aptina:   In the fourth quarter of 2009, the Company sold a 65% interest in Aptina, previously a wholly-owned subsidiary, to Acquisition L.P. (owned primarily by Riverwood Capital LLC and TPG Partners VI, L.P.).  A portion of the 65% interest held by Acquisition L.P. is in the form of convertible preferred shares that have a liquidation preference over the common shares.  As a result, as of June 3, 2010, the Company’s remaining interest represented 64% of Aptina’s common stock, and Acquisition L.P. held 36% of Aptina’s common stock.  The Company recognizes its share of earnings or losses from Aptina on a two-month lag.  The Company’s results of operations for the third quarter and first nine months of 2010 include losses of $11 million and $16 million, respectively, for its equity interest in Aptina.

The Company manufactures imaging products for Aptina under a wafer supply agreement.  In the third quarter and first nine months of 2010, the Company recognized sales of $92 million and $280 million, respectively, and cost of goods sold of $89 million and $283 million, respectively, from products sold to Aptina.

 
11

 



Accounts Payable and Accrued Expenses
 
June 3,
2010
   
September 3,
2009
 
             
Accounts payable
  $ 844     $ 526  
Salaries, wages and benefits
    278       147  
Related party payables
    203       83  
Income and other taxes
    54       32  
Customer advances
    7       150  
Other
    106       99  
    $ 1,492     $ 1,037  

Related party payables consisted of amounts primarily due to Inotera under the Inotera Supply Agreement, consisting of $136 million and $51 million as of June 3, 2010 and September 3, 2009, respectively, for the purchase of DRAM products and $32 million as of September 3, 2009 for underutilized capacity.  Related party payables as of June 3, 2010 also included $65 million for amounts due for the purchase of memory products related to the Hynix JV supply agreement.  (See “Equity Method Investments” note.)

As of September 3, 2009, customer advances included $142 million to provide certain NAND Flash memory products to Apple Computer, Inc. (“Apple”) through December 31, 2010 pursuant to a prepaid NAND Flash supply agreement.  As of June 3, 2010 and September 3, 2009, other accounts payable and accrued expenses included $11 million and $24 million, respectively, for amounts due to Intel for NAND Flash product design and process development and licensing fees pursuant to a product designs development agreement.

Debt
 
June 3,
2010
   
September 3,
2009
 
             
Convertible senior notes, stated interest rate of 1.875%, effective interest rate of 7.9%, net of discount of $255 million and $295 million, respectively, due June 2014
  $ 1,045     $ 1,005  
Capital lease obligations, weighted-average imputed interest rates of 6.7%, due in monthly installments through February 2023
    503       559  
TECH credit facility, effective interest rate of 4.0% and 3.6% , respectively, net of discount of $2 million and $2 million, respectively, due in periodic installments through May 2012
    398       548  
Convertible senior notes, interest rate of 4.25%, due October 2013
    230       230  
EDB note, denominated in Singapore dollars, interest rate of 5.4%
    --       208  
Mai-Liao Power note, stated interest rate of 2.5% and 2.4%, respectively, effective interest rate of 12.1%, net of discount of $7 million and $18 million, respectively, due November 2010
    193       182  
Convertible subordinated notes, interest rate of 5.6%, due April 2010
    --       70  
Other notes
    --       1  
      2,369       2,803  
Less current portion
    (652 )     (424 )
    $ 1,717     $ 2,379  

In the first quarter of 2010, the Company adopted a new accounting standard for certain convertible debt.  The new standard was applicable to the Company’s 1.875% convertible senior notes with an aggregate principal amount of $1.3 billion issued in May 2007 (the “Convertible Notes”) and required the liability and equity components of the Convertible Notes to be accounted for separately.  (See “Adjustments for Retrospective Application of New Accounting Standards” note.)

In the third quarter of 2010, the Company recorded $13 million in capital lease obligations with a weighted-average imputed interest rate of 9.6%, payable in periodic installments through May 2013.  As of June 3, 2010, $34 million of the Company’s total capital lease obligations contained covenants that require minimum levels of tangible net worth, cash and investments.  On May 13, 2010, the Company modified a loan agreement with a lender and, as a result, $21 million of previously restricted cash became available to the Company.  The Company was in compliance with its covenants related to capital lease obligations as of June 3, 2010.

 
12

 

 
The TECH credit facility is collateralized by substantially all of the assets of TECH (approximately $1,700 million as of June 3, 2010) 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.  In the first quarter of 2010, the covenants were modified and as of June 3, 2010, TECH was in compliance with the covenants.  The Company has guaranteed 100% of the outstanding amount of the TECH credit facility.  Under the terms of the credit facility, TECH had $60 million in restricted cash as of June 3, 2010.

On June 1, 2010, the Company repaid the outstanding balance of $213 million to the Singapore Economic Development Board that was due February 2012.

In the first quarter of 2010, the Company’s note payable to Nan Ya Plastics was replaced with a note payable to Mai-Liao Power Corporation, an affiliate of Nan Ya Plastics.  Nan Ya Plastics and Mai-Liao Power Corporation are subsidiaries of Formosa Plastics Corporation.  The note to Mai-Liao Power Corporation has the same terms and remaining maturity as the previous note to Nan Ya Plastics.  The Company’s note to Mai-Liao Power Corporation is collateralized by a first-priority security interest in certain of the Inotera shares owned by the Company aggregating a maximum market value of $250 million.  Based on Inotera’s share price as of June 3, 2010 and the number of shares underlying the collateral, the carrying value of the collateral was $135 million.  (See “Equity Method Investments – DRAM joint ventures with Nanya – Inotera” note.)

On April 1, 2010, the Company repaid the $70 million outstanding principal balance and accrued interest on the 5.6% convertible subordinated notes.  The conversion option of these notes expired unexercised.

Contingencies

The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below.  The Company is currently a party to other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s business, results of operations or financial condition.

In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party.  It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement.  Historically, payments made by the Company under these types of agreements have not had a material adverse effect on the Company’s business, results of operations or financial condition.

The Company is involved in the following antitrust, patent and securities matters.

Antitrust matters:   On May 5, 2004, Rambus, Inc. (“Rambus”) filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers alleging that the defendants harmed Rambus by engaging in concerted and unlawful efforts affecting Rambus DRAM (“RDRAM”) by eliminating competition and stifling innovation in the market for computer memory technology and computer memory chips.  Rambus’ complaint alleges various causes of action under California state law including, among other things, a conspiracy to restrict output and fix prices, a conspiracy to monopolize, intentional interference with prospective economic advantage, and unfair competition.  Rambus alleges that it is entitled to actual damages of more than a billion dollars and seeks joint and several liability, treble damages, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys’ fees and costs.  A trial date has not been scheduled.


 
13

 


 
At least sixty-eight purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging price-fixing in violation of federal and state antitrust laws, violations of state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002.  The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California 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 plaintiffs’ 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.  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 June 23, 2010, the Company executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States.  Subject to certain conditions, including final court approval of the class settlements, the Company agreed to pay a total of approximately $67 million in three equal installments over a two-year period.

Three purported class action DRAM lawsuits also have been filed against the Company in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act.  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 subsequently filed an appeal of each of those decisions.  On November 12, 2009, the British Columbia Court of Appeal reversed the denial of class certification and remanded the case for further proceedings.  The appeal of the Quebec case is still pending.

In February and March 2007, All American Semiconductor, Inc., Jaco Electronics, Inc., and the DRAM Claims Liquidation Trust each filed suit against the Company and other DRAM suppliers in the U.S. District Court for the Northern District of California after opting-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.

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice (“SDE”) announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry .   The SDE’s Notice of Investigation names various DRAM manufacturers and certain executives, including the Company, and focuses on the period from July 1998 to June 2002.  The Company has not yet been served with the investigation.

Three purported class action lawsuits alleging price-fixing of 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.

 
14

 


 
The Company is unable to predict the outcome of these lawsuits and therefore cannot estimate the range of possible loss.  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.

Patent matters:   As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or manufacturing processes infringe their intellectual property rights.  In this regard, the Company is engaged in litigation with Rambus relating to certain of Rambus’ patents and certain of the Company’s claims and defenses.  Lawsuits between Rambus and the Company are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy.  On January 9, 2009, the Delaware Court 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.  In the U.S. District Court for the Northern District of California, trial on a patent phase of the case has been stayed pending resolution of Rambus’ appeal of the Delaware 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 December 11, 2009, Ring Technology Enterprises of Texas LLC (“Ring”) filed suit against the Company in the U.S. District Court for the Eastern District of Texas alleging that certain of the Company’s memory products infringe one Ring Technology U.S. patent.  On June 26, 2010, the Company executed a settlement agreement with Ring resolving the dispute.

Among other things, the above lawsuits pertain to certain of the Company’s SDRAM, DDR SDRAM, DDR2 SDRAM, DDR3 SDRAM, RLDRAM and image sensor products, which account for a significant portion of net sales.

The Company is unable to predict the outcome of assertions of infringement made against the Company and therefore cannot estimate the range of possible loss.  A court determination that the Company’s products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes.  Any of the foregoing 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.  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.

The Company is unable to predict the outcome of these cases and therefore cannot estimate the range of possible loss.  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.


Adjustments for Retrospective Application of New Accounting Standards

Effective as of the beginning of 2010, the Company adopted new accounting standards for noncontrolling interests and certain convertible debt instruments.  These new accounting standards required retrospective application and the Company’s financial statements contained herein have been adjusted to reflect the impact of adopting these new accounting standards.  The impact of the retrospective adoption is summarized below.


 
15

 


 
Noncontrolling interests in subsidiaries:   Under the new standard, noncontrolling interests in subsidiaries is (1) reported as a separate component of equity in the consolidated balance sheets and (2) included in net income in the consolidated statement of operations.

Convertible debt instruments:   The new standard applies to convertible debt instruments that may be fully or partially settled in cash upon conversion and is applicable to the Company’s 1.875% convertible senior notes with an aggregate principal amount of $1.3 billion issued in May 2007 (the “Convertible Notes”).  The standard requires the liability and equity components of convertible notes to be accounted for separately, whereby the liability component recognized at the issuance of convertible notes equals the estimated fair value of a similar liability without a conversion option and the remainder of the proceeds received at issuance is allocated to equity.  In subsequent periods, the liability component recognized at issuance is amortized or accreted to the principal amount through interest expense.  The adoption of the new standard for the May 2007 Convertible Notes resulted in a $402 million decrease in debt, a $394 million increase in additional capital and an $8 million decrease in deferred debt issuance costs (included in other noncurrent assets).  Information related to the equity and debt components of the Convertible Notes is as follows:

As of
 
June 3,
2010
   
September 3,
2009
 
             
Principal amount of the Convertible Notes
  $ 1,300     $ 1,300  
Unamortized discount
    (255 )     (295 )
Carrying amount of the Convertible Notes
  $ 1,045     $ 1,005  
                 
Carrying amount of the equity component
  $ 394     $ 394  

The unamortized discount as of June 3, 2010 will be recognized as interest expense over approximately 4 years through the June 2014 maturity date of the Convertible Notes.

Information related to interest rates and expenses is as follows:

   
Quarter Ended
   
Nine Months Ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Effective interest rate
    7.9 %     7.9 %     7.9 %     7.9 %
Interest expense:
                               
Contractual interest coupon
  $ 6     $ 6     $ 18     $ 19  
Amortization of discount and issuance costs
    14       13       41       39  

Effect of adjustments for retrospective application of new accounting standards on financial statements:   The following tables set forth the financial statement line items affected by the retrospective application of the new accounting standards for noncontrolling interests and certain convertible debt as of and for the periods indicated:


 
16

 


   
Consolidated Statement of Operations
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
   
Noncontrolling Interests
   
Convertible Debt
 
                         
Quarter ended June 4, 2009:
                       
Other operating (income) expense, net
  $ 92     $ --     $ --     $ 92  
Interest expense
    (37 )     --       (12 )     (49 )
Other non-operating income (expense), net
    (3 )     --       (1 )     (4 )
Income tax (provision) benefit
    2       --       2       4  
Net loss
    (290 )     (33 )     (11 )     (334 )
Net loss attributable to Micron
    --       (290 )     (11 )     (301 )
Net loss per share:
                               
Basic and diluted
  $ (0.36 )   $ --     $ (0.01 )   $ (0.37 )
                                 
Nine months ended June 4, 2009:
                               
Other operating (income) expense, net
  $ 121     $ --     $ 1     $ 122  
Interest expense
    (102 )     --       (35 )     (137 )
Income tax (provision) benefit
    (15 )     --       1       (14 )
Net loss
    (1,747 )     (97 )     (35 )     (1,879 )
Net loss attributable to Micron
    --       (1,747 )     (35 )     (1,782 )
Net loss per share:
                               
Basic and diluted
  $ (2.22 )   $ --     $ (0.05 )   $ (2.27 )

   
Consolidated Balance Sheet
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
As of September 3, 2009
 
Noncontrolling Interests
   
Convertible Debt
 
                         
Assets
                       
Property, plant and equipment, net
  $ 7,081     $ --     $ 8     $ 7,089  
Other noncurrent assets
    371       --       (4 )     367  
Total assets
    11,455       --       4       11,459  
                                 
Liabilities and equity
                               
Long-term debt
  $ 2,674     $ --     $ (295 )   $ 2,379  
Total liabilities
    4,815       --       (295 )     4,520  
                                 
Micron shareholders’ equity:
                               
Additional capital
  $ 6,863     $ --     $ 394     $ 7,257  
Accumulated deficit
    (2,291 )     --       (94 )     (2,385 )
Accumulated other comprehensive (loss)
    (3 )     --       (1 )     (4 )
Total Micron shareholders’ equity
    --       4,654       299       4,953  
Total equity
    4,654       1,986       299       6,939  
Total liabilities and equity
    11,455       --       4       11,459  


 
17

 


   
Consolidated Statement of Cash Flows
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
   
Noncontrolling Interests
   
Convertible Debt
 
                         
Nine Months Ended June 4, 2009:
                       
Cash flows from operating activities:
                       
Net loss
  $ (1,747 )   $ (97 )   $ (35 )   $ (1,879 )
Depreciation and amortization
    1,648       --       35       1,683  
Noncontrolling interests in net income (loss)
    (97 )     97       --       --  


Derivative Financial Instruments

The Company is exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the Singapore dollar, euro and yen.  The Company uses derivative instruments to manage exposures to foreign currency.  The Company’s primary objective in entering into these derivatives is to reduce the volatility of earnings associated with changes in foreign currency.  The Company’s derivatives consist primarily of forward contracts that are designed to reduce the impact that changes in foreign exchange rates have on earnings attributable to Micron shareholders.  The Company utilizes a rolling hedge strategy with currency forward contracts that generally mature within 35 days.  The currency forward contracts are not designated for hedge accounting.  At the end of each reporting period, monetary assets and liabilities held or denominated in foreign currencies are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Foreign currency forward contracts are valued at fair values based on bid prices of dealer or exchange quotations (referred to as Level 2).  Realized and unrealized foreign currency gains and losses on derivative instruments and the underlying monetary assets are included in other operating income (expense).

The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Total gross notional amounts and fair values for derivative currency forward contracts outstanding as of June 3, 2010, presented by currency, were as follows:

Currency
 
Notional Amount Outstanding
(in U.S. Dollars)
 
Balance Sheet Line Item
 
Fair Value
of Asset (Liability)
 
               
Euro
  $ 251  
Accounts payable and accrued expenses
  $ (9 )
Singapore dollar
    154  
Accounts payable and accrued expenses
    (1 )
Yen
    60  
Receivables
    1  
Other
    8  
Accounts payable and accrued expenses
    --  
    $ 473       $ (9 )

For the third quarter and first nine months of 2010, the Company recognized losses of $23 million and $38 million, respectively, included in other operating income (expense), on currency forward contracts.


Fair Value Measurements

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


 
18

 


 
Fair value measurements on a recurring basis: Assets measured at fair value on a recurring basis as of June 3, 2010 and September 3, 2009 were as follows:

   
As of June 3, 2010
   
As of September 3, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                                 
Money market (1)
  $ 1,710     $ --     $ --     $ 1,710     $ 1,184     $ --     $ --     $ 1,184  
Certificates of deposit (2)
    --       379       --       379       --       217       --       217  
Marketable equity investments (3)
    17       --       --       17       15       --       --       15  
Assets held for sale (3)(4)
    --       --       137       137       --       --       --       --  
    $ 1,727     $ 379     $ 137     $ 2,243     $ 1,199     $ 217     $ --     $ 1,416  
                                                                 
(1) Included in cash   and equivalents.
 
(2) $297 million and $82 million included in cash   and equivalents and other noncurrent assets, respectively, as of June 3, 2010 and $187 million and $30 million, respectively, as of September 3, 2009.
 
(3) Included in other noncurrent assets.
 
(4) The Company adopted the accounting standard for fair value measurements of nonfinancial assets and nonfinancial liabilities as of the beginning of 2010.
 

Certificates of deposit assets are valued using observable inputs in active markets for similar assets or alternative pricing sources and models utilizing observable market inputs (Level 2).

Assets held for sale are primarily comprised of semiconductor equipment and are valued based on inputs obtained from equipment dealers that require assumptions including the remaining useful life and configuration of the equipment (Level 3).  Losses recognized in the third quarter and first nine months of 2010 due to fair value measurements using Level 3 inputs were de minimis.

Fair value of financial instruments :   As of June 3, 2010, the estimated aggregate fair value of the Company’s convertible debt instruments was $1,624 million compared to their aggregate carrying value of $1,275 million (the carrying value excludes the equity component of the Convertible Notes which is classified in equity).  As of September 3, 2009, the estimated aggregate fair value of the Company’s convertible debt instruments was $1,410 million compared to their aggregate carrying value of $1,305 million (the carrying value excludes the equity component of the Convertible Notes which is classified in equity).  The fair value of the Company’s convertible debt instruments is based on quoted market prices in active markets (Level 1).  As of June 3, 2010 and September 3, 2009, the aggregate fair value of the Company’s other debt instruments was $1,087 million and $1,458 million, respectively, as compared to their aggregate carrying value of $1,094 million and $1,498 million, respectively.  The fair value of the Company’s other debt instruments was estimated based on discounted cash flows using inputs that are observable in the market or that could be derived from or corroborated with observable market data, including interest rates based on yield curves of similar debt issues from parties with similar credit ratings as the Company (Level 2).  Amounts reported as cash and equivalents, short-term investments, receivables, other current assets, and accounts payable and accrued expenses approximate their fair values.

Fair value measurements on a nonrecurring basis:   In connection with the implementation of the new accounting standard for certain convertible debt instruments in the first quarter of 2010, the Company determined the $898 million fair value for the liability component of its Convertible Notes as of their May 2007 issuance date using a market interest rate for similar nonconvertible debt issued at that time by entities with credit ratings comparable to those of the Company (Level 2).  (See “Adjustments for Retrospective Application of New Accounting Standards” note.)


Equity Plans

As of June 3, 2010, the Company had an aggregate of 190.5 million shares of its common stock reserved for issuance of stock options and restricted stock awards, of which 132.9 million shares were subject to outstanding awards and 57.6 million shares were available for future grants.  Awards are subject to terms and conditions as determined by the Company’s Board of Directors.

Stock options:   The Company granted 0.1 million and 15.8 million stock options during the third quarter and first nine months of 2010, respectively, with weighted-average grant-date fair values per share of $5.17 and $4.13, respectively.  The Company granted 0.3 million and 21.1 million stock options during the third quarter and first nine months of 2009, respectively, with weighted-average grant-date fair values per share of $2.70 and $1.67, respectively.

 
19

 


The fair values of option awards were estimated as of the date of grant using the Black-Scholes option valuation model.  The Black-Scholes model requires the input of assumptions, including the expected stock price volatility and estimated option life.  The expected volatilities utilized were based on implied volatilities from traded options on the Company’s stock and on historical volatility.  The expected lives of options granted subsequent to 2008 were based, in part, on historical experience and on the terms and conditions of the options.  The expected lives of options granted prior to 2009 were based on the simplified method provided by the Securities and Exchange Commission.  The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at the time of the grant.  No dividends were assumed in estimated option values.  Assumptions used in the Black-Scholes model are presented below:

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Average expected life in years
    5.08       5.02       5.11       4.91  
Weighted-average expected volatility
    57 %     71 %     60 %     73 %
Weighted-average risk-free interest rate
    2.4 %     1.9 %     2.3 %     1.9 %

Restricted stock and restricted stock units (“Restricted Stock Awards”):   As of June 3, 2010, there were 14.1 million shares of Restricted Stock Awards outstanding, of which 4.9 million were performance-based Restricted Stock Awards.  For service-based Restricted Stock Awards, restrictions generally lapse either in one-fourth or one-third increments during each year of employment after the grant date.  For performance-based Restricted Stock Awards, vesting is contingent upon meeting certain performance goals.

The Company granted 5.9 million and 1.8 million shares of service-based and performance-based Restricted Stock Awards, respectively, during the first nine months of 2010, including 4.1 million of service-based and 0.7 million of performance-based Restricted Stock Awards as part of the Company’s acquisition of Numonyx.  During the first nine months of 2009, the Company granted 1.9 million and 1.7 million shares of service-based and performance-based Restricted Stock Awards, respectively.  The weighted-average grant-date fair values per share were $8.75 and $8.29 for Restricted Stock Awards granted during the third quarter and first nine months of 2010, respectively, and was $4.40 for Restricted Stock Awards granted during the first nine months of 2009.

Stock-based compensation expense:   Total compensation costs for the Company’s equity plans were as follows:

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Stock-based compensation expense by caption:
                       
Cost of goods sold
  $ 5     $ 4     $ 18     $ 12  
Selling, general and administrative
    9       4       39       12  
Research and development
    4       4       14       10  
Equity in net income (losses) of equity method investees
    2       --       2       --  
    $ 20     $ 12     $ 73     $ 34  
                                 
Stock-based compensation expense by type of award:
                               
Stock options
  $ 9     $ 7     $ 28     $ 22  
Restricted stock
    11       5       45       12  
    $ 20     $ 12     $ 73     $ 34  

During the first quarter of 2010, the Company determined that certain performance-based restricted stock that previously had not been expensed met the probability threshold for expense recognition due to improved operating results.  As of June 3, 2010, $127 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards was expected to be recognized through the third quarter of 2014, resulting in a weighted-average period of 1.24 years.  Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with the Company’s treatment of income or loss from its U.S. operations.  (See “Income Taxes” note.)

 
20

 


Restructure

In response to a severe downturn in the semiconductor memory industry and global economic conditions, the Company initiated a restructure plan 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.  Also, the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility in the first quarter of 2009.  In addition, the Company phased out all remaining 200mm DRAM wafer manufacturing operations in Boise, Idaho in the second half of 2009.  The following table summarizes restructure charges (credits) resulting from the restructure activities:

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
(Gain) loss from disposition of equipment
  $ (4 )   $ 7     $ (9 )   $ 150  
Severance and other termination benefits
    --       11       1       50  
Gain from termination of NAND Flash supply agreement
    --       --       --       (144 )
Other
    (1 )     1       1       2  
    $ (5 )   $ 19     $ (7 )   $ 58  

During the third quarter and first nine months of 2010, the Company made cash payments of $1 million and $7 million, respectively, for severance and related termination benefits and costs to decommission production facilities.  As of June 3, 2010, all amounts related to the restructure plan initiated in 2009 had been paid and as of September 3, 2009, $5 million of restructure costs, primarily related to severance and other termination benefits, were unpaid.  The Company does not expect to incur any additional material restructure charges related to the plan initiated in 2009.


Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
(Gain) loss on disposition of property, plant and equipment
  $ (1 )   $ 12     $ (10 )   $ 55  
(Gain) loss from changes in currency exchange rates
    1       28       20       25  
Other
    (19 )     52       (40 )     42  
    $ (19 )   $ 92     $ (30 )   $ 122  

Other operating income in the third quarter and first nine months of 2010 includes $16 million and $24 million, respectively, of grant income related to the Company’s operations in China.  Other operating income in the first nine months of 2010 also includes $11 million of receipts from the U.S. government in connection with anti-dumping tariffs which is reflected in other in the table above.  Other operating expense for the third quarter of 2009 includes a loss of $53 million to write down the carrying value of certain long-lived assets in connection with the Company’s sale of a majority interest in its Aptina imaging solutions business.



 
21

 


 
Income Taxes

Income taxes in the third quarter of 2010 include a benefit of $51 million from reduction of a portion of the deferred tax asset valuation allowance in connection with the expected sale of the Company's equity interest in the Hynix JV that was acquired as part of the Numonyx acquisition.  Except for this benefit, taxes in 2010 and 2009 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax.  The Company has a valuation allowance for a substantial portion of its net deferred tax asset associated with its U.S. operations.  Taxes attributable to U.S. operations in 2010 and 2009 were substantially offset by changes in the valuation allowance.

In connection with the acquisition of Numonyx, the Company accrued a $66 million liability related to uncertain tax positions on the tax years of Numonyx open to examination.  The Company has recorded an indemnification asset for a significant portion of these unrecognized income tax benefits related to uncertain tax positions.


Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding.  Diluted earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding plus the dilutive effects of stock options, convertible notes and restricted shares.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from diluted earnings per share calculations.  Antidilutive potential common shares that could dilute basic earnings per share in the future were 93.1 million and 94.7 million for the third quarter and first nine months of 2010, respectively, and were 271.2 million for the third quarter and first nine months of 2009.

During the third quarter of 2010, in connection with the acquisition of Numonyx, the Company issued 137.7 million shares of common stock and issued 4.8 million restricted stock units.  Of the restricted stock units issued, 1.6 million were vested as of the time of issuance on May 7, 2010.  In connection with the Numonyx acquisition, as of June 3, 2010, there were 21.0 million shares of stock in escrow as partial security for Numonyx shareholders’ indemnity obligations.  The shares held in escrow were included in diluted earnings per share but were excluded from basic earnings per share.  (See “Numonyx Holdings B.V.” note.)

   
Quarter ended
   
Nine months ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Net income (loss) available to Micron’s shareholders – Basic
  $ 939     $ (301 )   $ 1,508     $ (1,782 )
Net effect of assumed conversion of debt
    24       --       70       --  
Net income (loss) available to Micron’s shareholders – Diluted
  $ 963     $ (301 )   $ 1,578     $ (1,782 )
                                 
Weighted-average common shares outstanding – Basic
    885.4       813.3       860.0       786.5  
Net effect of dilutive equity awards, escrow shares and assumed conversion of debt
    164.0       --       159.7       --  
Weighted-average common shares outstanding – Diluted
    1,049.4       813.3       1,019.7       786.5  
                                 
Earnings (loss) per share:
                               
Basic
  $ 1.06     $ (0.37 )   $ 1.75     $ (2.27 )
Diluted
    0.92       (0.37 )     1.55       (2.27 )



 
22

 


 
Comprehensive Income (Loss)

The components of comprehensive income (loss) and comprehensive income (loss) attributable to Micron were as follows:

   
Quarter Ended
   
Nine Months Ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
Net income (loss)
  $ 960     $ (334 )   $ 1,541     $ (1,879 )
Other comprehensive income (loss), net of tax:
                               
Accumulated translation adjustment
    8       (22 )     19       (26 )
Unrealized gain on investment
    (3 )     3       1       7  
Other
    --       --       1       1  
Total other comprehensive income (loss)
    5       (19 )     21       (18 )
Comprehensive income (loss)
    965       (353 )     1,562       (1,897 )
Comprehensive (income) loss attributable to noncontrolling interests
    (21 )     33       (33 )     97  
Comprehensive income (loss) attributable to Micron
  $ 944     $ (320 )   $ 1,529     $ (1,800 )


Consolidated Variable Interest Entities

NAND Flash joint ventures with Intel (“IM Flash”):   The Company has formed two joint ventures with Intel (IM Flash Technologies, LLC formed January 2006 and IM Flash Singapore, LLP formed February 2007) to manufacture NAND Flash memory products for the exclusive benefit of the partners.  IMFT and IMFS are each governed by a Board of Managers, with the Company and Intel initially appointing an equal number of managers to each of the boards.  The number of managers appointed by each party adjusts depending on the parties’ ownership interests.  These ventures will operate until 2016 but are subject to prior termination under certain terms and conditions.  IMFT and IMFS are aggregated as IM Flash in the following disclosures due to the similarity of their ownership structure, function, operations and the way the Company’s management reviews the results of their operations.  The partner’s ownership percentages are based on contributions to the partnership.  As of June 3, 2010, the Company owned approximately 51% and Intel owned approximately 49% of IM Flash.

IM Flash is a variable interest entity because all costs of IM Flash are passed to the Company and Intel through product purchase agreements and IM Flash is dependent upon the Company and Intel for any additional cash requirements.  The Company and Intel are considered related parties under the accounting standards for consolidating variable interest entities due to restrictions on transfers of ownership interests.  As a result, the primary beneficiary of IM Flash is the entity that is most closely associated with IM Flash.  The Company considered several factors to determine whether it or Intel is more closely associated with IM Flash, including the size and nature of IM Flash’s operations relative to the Company and Intel and which entity had the majority of economic exposure under the purchase agreements.  Based on those factors, the Company determined that it is more closely associated with IM Flash and is therefore the primary beneficiary.  Accordingly, the financial results of IM Flash are included in the Company’s consolidated financial statements and all amounts pertaining to Intel’s interests in IM Flash are reported as noncontrolling interests in subsidiaries.

IM Flash manufactures NAND Flash memory products using designs developed by the Company and Intel.  Product design and other research and development (“R&D”) costs for NAND Flash are generally shared equally between the Company and Intel.  As a result of reimbursements received from Intel under a NAND Flash R&D cost-sharing arrangement, the Company’s R&D expenses were reduced by $24 million and $79 million for the third quarter and first nine months of 2010, respectively, and by $26 million and $83 million for the third quarter and first nine months of 2009, respectively.


 
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IM Flash sells products to the joint venture partners generally in proportion to their ownership interests at long-term negotiated prices approximating cost.  IM Flash sales to Intel were $204 million and $569 million for the third quarter and first nine months of 2010, respectively, and were $195 million and $728 million for the third quarter and first nine months of 2009, respectively.  As of June 3, 2010 and September 3, 2009, IM Flash had receivables from Intel primarily for sales of NAND Flash products of $117 million and $95 million, respectively.  In addition, as of June 3, 2010 and September 3, 2009, the Company had receivables from Intel of $30 million and $29 million, respectively, related to NAND Flash product design and process development activities.  As of June 3, 2010 and September 3, 2009, IM Flash had payables to Intel of $2 million and $3 million, respectively, for various services.

In the first quarter of 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore and the Company and Intel agreed to suspend tooling and the ramp of production at this facility through the first quarter of 2010.  In the second quarter of 2010, IM Flash began moving forward with start-up activities in the Singapore wafer fabrication facility, including placing purchase orders and preparing the facility for tool installations that will commence in 2011.  The level of the Company’s future capital contributions to IM Flash will depend on the extent to which Intel participates with the Company in future IM Flash capital calls.

The following table presents IM Flash’s distributions to, and contributions from, shareholders:

   
Quarter Ended
   
Nine Months Ended
 
   
June 3,
2010
   
June 4,
2009
   
June 3,
2010
   
June 4,
2009
 
                         
IM Flash distributions to the Company
  $ 75     $ 124     $ 254     $ 606  
IM Flash distributions to Intel
    72       119       244       582  
                                 
Company contributions to IM Flash
  $ 26     $ --     $ 51     $ 25  
Intel contributions to IM Flash
    24       --       24       24  

Total IM Flash assets and liabilities included in the Company’s consolidated balance sheets are as follows:

As of
 
June 3,
2010
   
September 3,
2009
 
             
Assets
           
Cash and equivalents
  $ 206     $ 114  
Receivables
    132       111  
Inventories
    146       161  
Other current assets
    5       8