Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 04/12/2011 16:54:36)






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 quarter period ended March 3, 2011

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   ¨

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

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

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


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

The number of outstanding shares of the registrant's common stock as of April 5, 2011, was 1,001,470,854.
 
 



 
 

 


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

MICRON TECHNOLOGY, INC.

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

   
Quarter Ended
   
Six Months Ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
                         
Net sales
  $ 2,257     $ 1,961     $ 4,509     $ 3,701  
Cost of goods sold
    1,822       1,319       3,550       2,616  
Gross margin
    435       642       959       1,085  
                                 
Selling, general and administrative
    146       100       286       197  
Research and development
    186       148       371       285  
Other operating (income) expense, net
    (76 )     (21 )     (267 )     (13 )
Operating income
    179       415       569       616  
                                 
Interest income
    7       2       15       4  
Interest expense
    (28 )     (46 )     (66 )     (93 )
Other non-operating income (expense), net
    --       (1 )     (114 )     55  
      158       370       404       582  
                                 
Income tax (provision) benefit
    (35 )     (4 )     (83 )     3  
Equity in net income (loss) of equity method investees, net of tax
    (48 )     13       (74 )     (4 )
Net income
    75       379       247       581  
                                 
Net income attributable to noncontrolling interests
    (3 )     (14 )     (20 )     (12 )
Net income attributable to Micron
  $ 72     $ 365     $ 227     $ 569  
                                 
Earnings per share:
                               
Basic
  $ 0.07     $ 0.43     $ 0.23     $ 0.67  
Diluted
    0.07       0.39       0.22       0.61  
                                 
Number of shares used in per share calculations:
                               
Basic
    988.1       847.6       980.5       847.0  
Diluted
    1,037.3       1,005.3       1,034.5       1,003.1  










See accompanying notes to consolidated financial statements.
 
 
1

 
 
 
MICRON TECHNOLOGY, INC.

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

 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Assets
           
Cash and equivalents
  $ 2,184     $ 2,913  
Receivables
    1,393       1,531  
Inventories
    1,957       1,770  
Other current assets
    120       119  
Total current assets
    5,654       6,333  
Intangible assets, net
    309       323  
Property, plant and equipment, net
    7,055       6,601  
Equity method investments
    535       582  
Restricted cash
    338       335  
Other noncurrent assets
    507       519  
Total assets
  $ 14,398     $ 14,693  
                 
Liabilities and equity
               
Accounts payable and accrued expenses
  $ 1,815     $ 1,509  
Deferred income
    285       298  
Equipment purchase contracts
    70       183  
Current portion of long-term debt
    420       712  
Total current liabilities
    2,590       2,702  
Long-term debt
    1,320       1,648  
Other noncurrent liabilities
    526       527  
Total liabilities
    4,436       4,877  
                 
Commitments and contingencies
               
                 
Micron shareholders' equity:
               
Common stock, $0.10 par value, 3,000 shares authorized, 1,000.9 shares issued and outstanding (994.5 as of September 2, 2010)
    100       99  
Additional capital
    8,570       8,446  
Accumulated deficit
    (309 )     (536 )
Accumulated other comprehensive income
    101       11  
Total Micron shareholders' equity
    8,462       8,020  
Noncontrolling interests in subsidiaries
    1,500       1,796  
Total equity
    9,962       9,816  
Total liabilities and equity
  $ 14,398     $ 14,693  








See accompanying notes to consolidated financial statements.
 
 
2

 
 
MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)

 
Six months ended
 
March 3, 2011
   
March 4, 2010
 
             
Cash flows from operating activities
           
Net income
  $ 247     $ 581  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation expense and amortization of intangible assets
    1,003       937  
Amortization of debt discount and financing costs
    30       41  
Loss on extinguishment of debt
    111       --  
Equity in net (income) losses of equity method investees, net of tax
    74       4  
Stock-based compensation
    38       53  
Gain from Inotera stock issuance
    --       (56 )
Change in operating assets and liabilities:
               
(Increase) decrease in receivables
    154       (310 )
(Increase) in inventories
    (196 )     (102 )
Increase in accounts payable and accrued expenses
    94       66  
(Decrease) in customer prepayments
    (1 )     (103 )
Increase (decrease) in deferred income
    (11 )     5  
Other
    (2 )     14  
Net cash provided by operating activities
    1,541       1,130  
                 
Cash flows from investing activities
               
Expenditures for property, plant and equipment
    (1,189 )     (155 )
Acquisition of noncontrolling interests in TECH
    (159 )     --  
Additions to equity method investments
    (11 )     (143 )
Increase in restricted cash
    (1 )     (29 )
Proceeds from sales of property, plant and equipment
    96       36  
Return of equity method investment
    48       --  
Other
    (22 )     28  
Net cash used for investing activities
    (1,238 )     (263 )
                 
Cash flows from financing activities
               
Repayments of debt
    (812 )     (370 )
Payments on equipment purchase contracts
    (221 )     (136 )
Distributions to noncontrolling interests
    (99 )     (172 )
Proceeds from equipment sale-leaseback transactions
    95       --  
Proceeds from debt
    --       200  
Other
    5       (4 )
Net cash used for financing activities
    (1,032 )     (482 )
                 
Net increase (decrease) in cash and equivalents
    (729 )     385  
Cash and equivalents at beginning of period
    2,913       1,485  
Cash and equivalents at end of period
  $ 2,184     $ 1,870  
                 
Supplemental disclosures
               
Income taxes refunded (paid), net
  $ (60 )   $ 1  
Interest paid, net of amounts capitalized
    (35 )     (51 )
Noncash investing and financing activities:
               
Equipment acquisitions on contracts payable and capital leases
    187       232  
Exchange of convertible notes
    175       --  
Acquisition of interest in Transform
    --       65  

See accompanying notes to consolidated financial statements.
 
 
3

 


MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions except per share amounts)
(Unaudited)
 
Business and Basis of Presentation

Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise) 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, we manufacture CMOS image sensors and other semiconductor products.  The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended September 2, 2010.  In the opinion of our management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our consolidated financial position and our consolidated results of operations and cash flows.  Certain reclassifications have been made to prior period amounts to conform to current period presentation.

In the second quarter of 2011, we reorganized our business to better align with our markets and technology groups.  After our reorganization, we have the following four reportable segments:  DRAM Solutions Group ("DSG"), NAND Solutions Group ("NSG"), Wireless Solutions Group ("WSG") and Embedded Solutions Group ("ESG").  Our other operations do not meet the quantitative thresholds of a reportable segment and are reported under All Other.  All Other includes our CMOS image sensor, microdisplay and solar operations.  All prior period amounts have been retrospectively adjusted to reflect the reorganization in the second quarter of 2011.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  Our second quarter of fiscal 2011 and 2010 ended on March 3, 2011 and March 4, 2010, respectively.  Our fiscal 2010 ended on September 2, 2010.  All period references are our fiscal periods unless otherwise indicated.  These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 2, 2010.


Variable Interest Entities

We have interests in joint venture entities that are variable interest entities ("VIEs").  If we are the primary beneficiary of the VIE, we are required to consolidate it.  To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.  Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing and other applicable agreements and circumstances.  Our assessments of whether we are the primary beneficiary of our VIEs requires significant assumptions and judgment.  For further information regarding our VIEs that we account for under the equity method, see "Equity Method Investments" note.  For further information regarding our consolidated VIEs, see "Consolidated Variable Interest Entities" note.

Unconsolidated Variable Interest Entities

Inotera and MeiYa – Inotera Memories, Inc. ("Inotera") and MeiYa Technology Corporation ("MeiYa") are VIEs because of the terms of their supply agreements with us and our partner, Nanya Technology Corporation ("Nanya").  We have determined that we do not have power to direct the activities of Inotera and MeiYa that most significantly impact their economic performance, primarily due to (1) limitations on our governance rights that require the consent of other parties for key operating decisions and (2) our dependence on our joint venture partner for financing and the ability to operate in Taiwan.  Therefore, we account for our interests in these entities under the equity method.
 
 
4

 
 
Transform – Transform Solar Pty Ltd. ("Transform") is a VIE because its equity is not sufficient to permit Transform to finance its activities without additional subordinated financial support from us and our partner, Origin Energy Limited ("Origin").  We have determined that we do not have power to direct the activities of Transform that most significantly impacts its economic performance, primarily due to limitations on our governance rights that require the consent of other parties for key operating decisions.  Therefore, we account for our interest in Transform under the equity method.

Consolidated Variable Interest Entities

IMFT and IMFS – IM Flash Technologies, LLC ("IMFT") and IM Flash Singapore LLP ("IMFS") are both VIEs because all of their costs are passed to us and our partner, Intel Corporation ("Intel"), through product purchase agreements and they are dependent upon us and Intel for any additional cash requirements.  For both IM Flash entities (i.e., IMFT and IMFS), we determined that we have the power to direct the activities of the entities that most significantly impact their economic performance.  The primary activities of the IM Flash entities are driven by the constant introduction of product and process technology.  Because we perform a significant majority of the technology development, we have the power to direct key activities of the entities.  In addition, IMFT manufactures certain products exclusively for us using our technology.  As a result of our 78% ownership interest in IMFS, we have significantly greater economic exposure than Intel.  We also determined that we have the obligation to absorb losses and the right to receive benefits from the IM Flash entities that could potentially be significant to these entities.  Therefore, we consolidate the IM Flash entities.

MP Mask – MP Mask Technology Center, LLC ("MP Mask") is a VIE because all of its costs are passed to us and our partner, Photronics, Inc. ("Photronics"), through product purchase agreements and it is dependent upon us and Photronics for any additional cash requirements.  We determined that we have the power to direct the activities of MP Mask that most significantly impacts its economic performance, primarily due to (1) our tie-breaking voting rights over key operating decisions and (2) that nearly all key MP Mask activities are driven by our supply needs.  We also determined that we have the obligation to absorb losses and the right to receive benefits from MP Mask that could potentially be significant to MP Mask.  Therefore, we consolidate MP Mask.


Recently Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on VIEs which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a VIE with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and (3) requires additional disclosures about an enterprise's involvement in a VIE.  We adopted this standard as of the beginning of 2011.  The initial adoption of this standard did not have a significant impact on our financial statements as of the adoption date.  The impact on future periods will depend on changes in the nature and composition of our VIEs.


Numonyx

On May 7, 2010, we acquired Numonyx Holdings B.V. ("Numonyx"), which manufactured and sold primarily NOR Flash and NAND Flash memory products.  The total fair value of the consideration paid for Numonyx was $1,112 million and consisted of 137.7 million shares of our common stock issued to the Numonyx shareholders and 4.8 million restricted stock units issued to employees of Numonyx.  In connection with the acquisition, we recorded net assets of $1,549 million.  Because the fair value of the net assets acquired exceeded the purchase price, we recognized a gain on the acquisition of $437 million in the third quarter of 2010.  In addition, we recognized a $51 million income tax benefit in connection with the acquisition.

The following unaudited pro forma financial information presents the combined results of operations as if Numonyx had been combined with us as of the beginning of 2009.  The pro forma financial information includes the accounting effects of the business combination, including adjustments to the amortization of intangible assets, depreciation of property, plant and equipment, interest expense and elimination of intercompany sales.  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 Numonyx been combined with us as of the beginning of 2009.


 
5

 


   
Quarter ended
March 4, 2010
   
Six months ended
March 4, 2010
 
             
Net sales
  $ 2,497     $ 4,708  
Net income
    364       556  
Net income attributable to Micron
    350       544  
Earnings per share:
               
Basic
  $ 0.36     $ 0.55  
Diluted
    0.33       0.52  

The unaudited pro forma financial information for the quarter and six months ended March 4, 2010 includes our results for the quarter and six months ended March 4, 2010, respectively, and the results of Numonyx, including the adjustments described above, for its fiscal quarter and six months ended December 31, 2009, respectively.


Receivables
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Trade receivables (net of allowance for doubtful accounts of $2 million and $4 million, respectively)
  $ 1,061     $ 1,238  
Income and other taxes
    123       115  
Related party receivables
    58       64  
Other
    151       114  
    $ 1,393     $ 1,531  

As of March 3, 2011 and September 2, 2010, related party receivables included $54 million and $57 million, respectively, due from Aptina Imaging Corporation ("Aptina") under a wafer supply agreement for image sensor products.  (See "Equity Method Investments" note.)

As of March 3, 2011 and September 2, 2010, other receivables included $30 million and $30 million, respectively, due from Intel for amounts related to NAND Flash product design and process development activities under cost-sharing agreements.  As of March 3, 2011 and September 2, 2010, other receivables also included $22 million and $17 million, respectively, from Nanya in connection with a DRAM development cost-sharing agreement.  (See "Equity Method Investments" note and "Consolidated Variable Interest Entities" note.)


Inventories
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Finished goods
  $ 558     $ 623  
Work in process
    1,270       1,031  
Raw materials and supplies
    129       116  
    $ 1,957     $ 1,770  


 
6

 


 
Intangible Assets

As of
 
March 3, 2011
   
September 2, 2010
 
   
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
                         
Product and process technology
  $ 458     $ (204 )   $ 439     $ (181 )
Customer relationships
    127       (74 )     127       (66 )
Other
    23       (21 )     23       (19 )
    $ 608     $ (299 )   $ 589     $ (266 )

During the first six months of 2011 and 2010, we capitalized $24 million and $15 million, respectively, for product and process technology with weighted-average useful lives of 9 years and 10 years, respectively.

Amortization expense was $18 million and $37 million for the second quarter and first six months of 2011, respectively, and $17 million and $34 million for the second quarter and first six months of 2010, respectively.  Annual amortization expense for intangible assets is estimated to be $74 million for 2011, $65 million for 2012, $59 million for 2013, $51 million for 2014 and $32 million for 2015.


Property, Plant and Equipment
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Land
  $ 95     $ 95  
Buildings
    4,440       4,394  
Equipment
    14,158       12,970  
Construction in progress
    173       73  
Software
    288       281  
      19,154       17,813  
Accumulated depreciation
    (12,099 )     (11,212 )
    $ 7,055     $ 6,601  

Depreciation expense was $485 million and $966 million for the second quarter and first six months of 2011, respectively, and $449 million and $903 million for the second quarter and first six months of 2010, respectively.

Other noncurrent assets included buildings, equipment, and other assets classified as held for sale of $41 million as of March 3, 2011 and $56 million as of September 2, 2010.


Equity Method Investments

As of
 
March 3, 2011
   
September 2, 2010
 
   
Carrying Value
   
Ownership Percentage
   
Carrying Value
   
Ownership Percentage
 
                         
Inotera
  $ 441       29.7 %   $ 434       29.9 %
MeiYa
    1       50.0 %     44       50.0 %
Transform
    81       50.0 %     82       50.0 %
Aptina
    12       35.0 %     22       35.0 %
    $ 535             $ 582          
 
 
7

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

   
Quarter ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Inotera:
                       
Equity method income (losses)
  $ (45 )   $ 4     $ (71 )   $ (22 )
Inotera Amortization
    12       13       24       26  
Other
    (2 )     (2 )     (2 )     (3 )
      (35 )     15       (49 )     1  
Transform
    (9 )     --       (16 )     --  
Aptina
    (4 )     (2 )     (9 )     (5 )
    $ (48 )   $ 13     $ (74 )   $ (4 )
 
Our maximum exposure to loss from our involvement with our equity method investments that are VIEs was as follows:

As of
 
March 3, 2011
 
       
Inotera
  $ 381  
MeiYa
    1  
Transform
    84  

The maximum exposure to loss primarily included the carrying value of our investment as well as related translation adjustments in accumulated other comprehensive income and receivables, if any.  We may also incur losses in connection with our obligations under a supply agreement with Inotera (the "Inotera Supply Agreement") for rights and obligations to purchase 50% of Inotera's wafer production capacity of DRAM products.

Inotera and MeiYa DRAM joint ventures with Nanya:   We have partnered with Nanya in two Taiwanese DRAM memory companies, Inotera and MeiYa.  Under a licensing arrangement with Nanya, we recognized $26 million and $52 million of license revenue in net sales from this agreement during the second quarter and first six months of 2010, respectively, and had recognized a total of $207 million through the completion of the arrangement in April 2010.  Under a cost-sharing arrangement beginning in April 2010, we share equally in DRAM development costs with Nanya and, as a result, our research and development costs were reduced by $33 million and $63 million for the second quarter and first six months of 2011, respectively.  In addition, we received $6 million and $13 million of royalty revenue for the second quarter and first six months of 2011, respectively, 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.

Inotera :  In the first quarter of 2009, we completed our acquisition of a 35.5% ownership interest in Inotera.  As a result of Inotera's sale of common shares in a public offering, our equity ownership interest decreased from 35.5% to 29.8% and we recognized a gain of $56 million in the first quarter of 2010.  In the second quarter of 2010, as part of another Inotera offering of common shares, we and Nanya each paid $138 million to purchase additional shares, slightly increasing our equity ownership interest from 29.8% to 29.9%.  In the second quarter of 2011, our ownership interest was reduced by shares issued under Inotera's employee stock plans and as of March 3, 2011, we held a 29.7% ownership interest in Inotera, Nanya held a 29.8% ownership interest, and the balance was publicly held.

The carrying value of our initial investment is less than our proportionate share of Inotera's equity.  This difference is being amortized as a credit to earnings through equity in net income (losses) of equity method investees (the "Inotera Amortization").  As of March 3, 2011, $97 million of Inotera Amortization remained to be recognized over a weighted-average period of 4 years.  The $56 million gain recognized in the first quarter of 2010 on Inotera's issuance of shares included $33 million of accelerated Inotera Amortization.

 
8

 
 
In connection with the initial acquisition of our shares in Inotera, we and Nanya entered into the Inotera Supply Agreement.  Our cost of the wafers purchased under the Inotera Supply Agreement is based on a margin-sharing formula that considers all parties' manufacturing costs related to wafers purchased from Inotera, as well as the selling prices of our and Nanya's products from these wafers.  Under the Inotera Supply Agreement, we purchased $167 million and $304 million of DRAM products in the second quarter and first six months of 2011, respectively, and $187 million and $355 million of DRAM products in the second quarter and first six months of 2010, respectively.

As of March 3, 2011 and September 2, 2010, there were gains of $61 million and $7 million, respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our investment in Inotera.  Based on the closing trading price of Inotera's shares in an active market on March 3, 2011, the market value of our equity interest in Inotera was $717 million.

MeiYa :  In 2008, we completed our acquisition of a 50% interest in MeiYa.  In connection with our acquisition of an equity interest in Inotera, we entered into agreements with Nanya pursuant to which both parties ceased future funding of, and resource commitments to, MeiYa.  Additionally, MeiYa has sold substantially all of its assets to Inotera.  In the second quarter of 2011, we and Nanya each received a distribution from MeiYa of $48 million as a return of capital, representing substantially all of MeiYa's assets.  As of September 2, 2010, there were losses of $(5) million in accumulated other comprehensive income (loss) for cumulative translation adjustments from MeiYa.

Transform:   In 2009, we acquired a 50% interest in Transform.  In exchange for the equity interest in Transform, we contributed nonmonetary assets, which consisted of manufacturing facilities, equipment, intellectual property and a fully-paid lease to a portion of our Boise, Idaho manufacturing facilities.  As of March 3, 2011, we and Origin each held a 50% ownership interest in Transform.  During the second quarter and first six months of 2011, we and Origin each contributed $4 million and $11 million, respectively, of cash to Transform, and in the second quarter of 2010, we and Origin each contributed $5 million of cash to Transform.  Our results of operations for the second quarter and first six months of 2011 included $6 million and $11 million, respectively, of net sales, which approximates our cost, for transition services provided to Transform.

Aptina:   In 2009, we sold a 65% interest in Aptina, previously a wholly-owned subsidiary.  A portion of the 65% interest we sold is in the form of convertible preferred shares that have a liquidation preference over the common shares.  As a result, we recognize our share of Aptina's earnings or losses based on our common stock ownership percentage, which was 64% as of March 3, 2011.

We manufacture components for CMOS image sensors for Aptina under a wafer supply agreement.  For the second quarter and first six months of 2011, we recognized sales of $82 million and $141 million, respectively, and cost of goods sold of $85 million and $157 million, respectively, from products sold to Aptina.  For the second quarter and first six months of 2010, we recognized sales of $80 million and $188 million, respectively, and cost of goods sold of $86 million and $194 million, respectively, from products sold to Aptina.


Accounts Payable and Accrued Expenses
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Accounts payable
  $ 1,180     $ 799  
Salaries, wages and benefits
    272       346  
Related party payables
    183       194  
Income and other taxes
    45       51  
Other
    135       119  
    $ 1,815     $ 1,509  

Related party payables included amounts primarily due to Inotera under the Inotera Supply Agreement of $181 million and $105 million as of March 3, 2011 and September 2, 2010, respectively, for the purchase of DRAM products.  Related party payables as of September 2, 2010 also included $86 million for amounts due for the purchase of memory products under a supply agreement with Hynix.

As of March 3, 2011 and September 2, 2010, other accounts payable and accrued expenses included $19 million and $16 million, respectively, for amounts due to Intel for NAND Flash product design and process development and licensing fees pursuant to cost-sharing agreements.  (See "Consolidated Variable Interest Entities" note.)
 
 
9

 
 
Debt
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Convertible senior notes, stated interest rate of 1.875%, effective interest rate of 7.9%, net of discount of $156 million and $242 million, respectively, due June 2014
  $ 793     $ 1,058  
Capital lease obligations, weighted-average effective interest rate of 6.2% and 7.2%, respectively, due in monthly installments through February 2023
    427       527  
TECH credit facility, effective interest rates of 3.9% net of discount of $1 million and $2 million, respectively, due in periodic installments through May 2012
    249       348  
Convertible senior notes, interest rate of 4.25%, due October 2013
    139       230  
Convertible senior notes, stated interest rate of 1.875%, effective interest rate of 7.0%, net of discount of $43 million, due June 2027
    132       --  
Mai-Liao Power note, effective interest rate of 12.1%, net of discount of $4 million as of September 2, 2010
    --       196  
Other notes
    --       1  
      1,740       2,360  
Less current portion
    (420 )     (712 )
    $ 1,320     $ 1,648  

In March 2011, subsequent to our second quarter of 2011, we paid the remaining $250 million outstanding principal balance of the TECH credit facility, plus accrued interest, that was due in periodic payments through May 2012.  In connection therewith, $60 million of cash that was previously restricted became available to us.  (See "TECH Semiconductor Singapore Pte. Ltd." note.)

In the second quarter of 2011, we received $95 million in proceeds from sales-leaseback transactions and as a result recorded capital lease obligations aggregating $83 million with an imputed interest rate of 5.4%, payable in periodic installments through March 2016.  In the second quarter of 2011, we also recorded $21 million in capital lease obligations with an imputed interest rate of 3.4%, payable in periodic installments through October 2011.

Debt Restructure :  On November 3, 2010, we completed the following series of debt restructure transactions in connection with separate privately negotiated agreements entered into on October 28, 2010 with certain holders of our convertible notes:

·  
Exchanged $175 million in aggregate principal amount of our 1.875% Convertible Senior Notes due 2014 (the "2014 Notes") for $175 million in aggregate principal amount of new 1.875% Convertible Senior Notes due 2027 (the "2027 Notes") (the "Exchange Transaction").

·  
Repurchased $176 million in aggregate principal amount of our 2014 Notes for $171 million in cash (the "Partial Repurchase of 2014 Notes").

·  
Repurchased $91 million in aggregate principal amount of our 4.25% Convertible Senior Notes due 2013 (the "2013 Notes") for $166 million in cash (the "Partial Repurchase of 2013 Notes").

Exchange Transaction :  In the Exchange Transaction, $175 million in aggregate face value of our 2014 Notes were extinguished.  The liability and equity components of the 2014 Notes were stated separately pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion.  Accordingly, the extinguishment resulted in the derecognition of $144 million in debt for the principal of the 2014 Notes (net of $31 million of debt discount) and $13 million of additional capital.  We recognized a loss of $15 million on the exchange based on the estimated $157 million fair value of the debt component of the 2014 Notes exchanged and their $142 million carrying value (net of unamortized issuance costs).
 
 
10

 

The liability and equity components of the 2027 Notes issued in the Exchange Transaction were also stated separately pursuant to the accounting standards.  As of the issuance date of the 2027 Notes, we recorded $130 million as debt, $40 million as additional capital and $2 million for deferred debt issuance costs (included in other noncurrent assets).  The amount recorded as debt is based on the fair value of the debt component as a standalone instrument, which was determined using an interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance.  The $45 million difference between the debt recorded at inception and its principal amount will be accreted to principal through interest expense to the 2027 Notes' estimated maturity in June 2017.  The fair value of the 2027 Notes was based on the trading price on the exchange date (Level 1).  The fair value of the debt components of the 2014 Notes and the 2027 Notes were estimated using an interest rate for nonconvertible debt, with terms similar to the debt components of the notes on a stand-alone basis, issued by entities with credit ratings comparable to ours at the exchange date (Level 2).

The 2027 Notes have an initial conversion rate of 91.7431 shares of common stock per $1,000 principal amount, subject to adjustment upon certain events specified in the indenture, and are convertible, subject to the conditions specified below, into (1) cash up to the aggregate principal amount of 2027 Notes, and (2) shares of our common stock or cash, at our election, for the remainder, if any, of our conversion obligation.  As a result of these settlement terms upon conversion, only the amounts payable in excess of the principal amounts of the 2027 Notes are considered in diluted earnings per share under the treasury stock method.

The 2027 Notes may be converted by their holders on or after March 1, 2027 until June 1, 2027.  Prior to March 1, 2027, the 2027 Notes may be converted by their holders under any of the following circumstances: (1) during any calendar quarter beginning after December 31, 2010 (and only during such calendar quarter) if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 130% of the conversion price (approximately $14.17); (2) the 2027 Notes have been called for redemption; (3) specified distributions to holders of our common stock are made, or specified corporate events occur; (4) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2027 Notes for each trading day of that period is less than 98% of the product of the closing price of our common stock and the conversion rate of the 2027 Notes; or (5) upon our election to terminate the conversion right of the 2027 Notes.

If the 2027 Notes are converted by their holders in connection with a make-whole change in control (as defined in the indenture), we may, under certain circumstances, be required to pay a make-whole premium in the form of an increase in the conversion rate.  Additionally, in the event of (1) a change in control or (2) on June 1, 2017, we may be required to repurchase all or a portion of the 2027 Notes at a repurchase price equal to 100% of the principal amount, plus accrued interest.  We may elect to redeem all or any portion of the 2027 Notes on or after June 1, 2014, at a redemption price equal to 100% of the principal amount, plus accrued interest.

We may elect to terminate the conversion right of the 2027 Notes if the daily volume weighted average price of our common stock is greater than or equal to 130% of the conversion price for at least 20 trading days during any 30 consecutive trading day period.  If we terminate the conversion right prior to June 1, 2014 and any 2027 Notes are converted in connection with the termination, we will pay a make-whole premium equal to the accrued interest as of the conversion date plus the interest that would have been paid through May 31, 2014.  Subject to the terms of the indenture, we may, at our election, deliver shares of common stock in lieu of cash with respect to this make-whole payment.

Partial Repurchase of the 2014 Notes :  Because the liability and equity components of the 2014 Notes were stated separately, the repurchase of $176 million aggregate principal amount resulted in the derecognition of $144 million in debt (net of $32 million of debt discount) and $13 million of additional capital.  We recognized a loss of $17 million (including transaction fees) on the repurchase based on the estimated $158 million fair value of the debt components of the 2014 Notes repurchased.  The fair value of the debt component of the 2014 Notes was estimated using an interest rate for nonconvertible debt, with terms similar to the debt component of the 2014 Notes on a stand-alone basis, issued by entities with credit ratings comparable to ours at the exchange date (Level 2).

Partial repurchase of the 2013 Notes :  We recognized a loss of $79 million (including transaction fees) in the repurchase of the 2013 Notes.
 
 
11

 

Debt Guarantee :  Concurrent with the Numonyx acquisition, we entered into agreements with STMicroelectronics N.V. and DBS Bank Ltd. ("DBS")   that require us to guarantee an outstanding loan, made by DBS to Hynix-Numonyx Semiconductor Ltd. (the "Hynix JV").  The outstanding balance of the Hynix JV loan was $250 million as of the acquisition date and is due in periodic installments from calendar 2014 through 2016.  Under the agreements, we deposited $250 million, accounted for as restricted cash, into a pledged account at DBS to collateralize the guarantee of the loan.  The amount on deposit and our guarantee decrease as payments are made by the Hynix JV against the loan.  As of March 3, 2011, we had a liability of $15 million for the guarantee.
 
 
Contingencies

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

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

We are 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 us 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.  Trial is scheduled to begin in June 2011.

At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging 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.  In July, 2006, the Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California.  The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief.  On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.  On June 23, 2010, we executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States.  Subject to certain conditions, including final court approval of the class settlements, we agreed to pay a total of approximately $67 million in three equal installments over a two-year period.
 
 
12

 

Three putative class action lawsuits alleging price-fixing of DRAM products also have been filed against us in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, asserting violations of the Canadian Competition Act and other common law claims.  The claims were initiated between December 2004 (BC) and June 2006 (Quebec). The plaintiffs seek monetary damages, restitution, costs, and attorneys' fees. 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 us 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 us, and focuses on the period from July 1998 to June 2002.

On September 24, 2010, Oracle America Inc. ("Oracle"), successor to Sun Microsystems, a DRAM purchaser that opted-out of a direct purchaser class action suit that was settled, filed suit against us in U.S. District Court for the Northern District of California.  The complaint alleges DRAM price-fixing and other violations of federal and state antitrust and unfair competition laws based on purported conduct for the period from August 1, 1998 through at least June 15, 2002.  Oracle is seeking joint and several damages, trebled, as well as restitution, disgorgement, attorneys' fees, costs and injunctive relief.

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

Patent matters:   As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe their intellectual property rights.  In this regard, we are engaged in litigation with Rambus relating to certain of Rambus' patents and certain of our claims and defenses.  Our lawsuits with Rambus 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 August 28, 2000, we filed a complaint against Rambus in the U.S. District Court for the District of Delaware seeking monetary damages and declaratory and injunctive relief.  The complaint alleges, among other things, various anticompetitive activities and also seeks a declaratory judgment that certain Rambus patents are invalid or unenforceable.  Rambus subsequently filed an answer and counterclaim in Delaware alleging, among other things, infringement of twelve Rambus patents and seeking monetary damages and injunctive relief.  We subsequently added claims and defenses based on Rambus' alleged spoliation of evidence and litigation misconduct.  The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007.  On January 9, 2009, Judge Robinson entered an opinion in our favor holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against us.  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, Rambus' complaint alleges that certain of our DDR2, DDR3, RLDRAM, and RLDRAM II products infringe as many as fourteen Rambus patents and seeks monetary damages, treble damages, and injunctive relief.  The trial on the patent phase of that case has been stayed pending resolution of Rambus' appeal of the Delaware spoliation decision or further order of the California Federal Court.

On March 6, 2009, Panavision Imaging, LLC filed suit against us and Aptina Imaging Corporation, then a wholly-owned subsidiary ("Aptina"), in the U.S. District Court for the Central District of California.  The complaint alleged that certain of our and Aptina's image sensor products infringed four Panavision Imaging U.S. patents and sought injunctive relief, damages, attorneys' fees, and costs.  On February 7, 2011, the Court ruled that one of the four patents in suit was invalid.  On March 10, 2011, claims relating to the remaining three patents in suit were dismissed with prejudice.
 
 
13

 

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

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

Securities matters:   On February 24, 2006, a putative class action complaint was filed against us and certain of our officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  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 our stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct.  The complaint seeks unspecified damages, interest, attorneys' fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of our stock during the period from February 24, 2001 to September 18, 2002.  On August 24, 2010, we executed a settlement agreement resolving these purported class-action cases.  Subject to certain conditions, including final court approval of the class settlement, we agreed to pay $6 million as our contribution to the settlement.


Micron Shareholders' Equity and Noncontrolling Interests in Subsidiaries

Changes in the components of equity were as follows:

   
Six Months Ended March 3, 2011
   
Six Months Ended March 4, 2010
 
   
Attributable to Micron
   
Noncontrolling Interest
   
Total Equity
   
Attributable to Micron
   
Noncontrolling Interest
   
Total Equity
 
                                     
Beginning Balance
  $ 8,020     $ 1,796     $ 9,816     $ 4,953     $ 1,986     $ 6,939  
                                                 
Net income
    227       20       247       569       12       581  
Other comprehensive income
    90       5       95       16       --       16  
Comprehensive income
    317       25       342       585       12       597  
                                                 
Acquisition of noncontrolling interests in TECH
    67       (226 )     (159 )     10       (10 )     --  
Net distributions to noncontrolling interests
    --       (95 )     (95 )     --       (172 )     (172 )
Capital and other transactions attributable to Micron
    58       --       58       54       --       54  
Ending Balance
  $ 8,462     $ 1,500     $ 9,962     $ 5,602     $ 1,816     $ 7,418  


Derivative Financial Instruments

We are exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the euro, Singapore dollar, yen, Israel shekel and Malaysia ringgit.  We are also exposed to currency exchange rate risk for capital expenditures denominated in foreign currency, primarily the euro and yen.  We use derivative instruments to manage our exposures to foreign currency.  For exposures associated with our monetary assets and liabilities, our primary objective in entering into currency derivatives is to reduce the volatility that changes in foreign currency exchange rates have on earnings attributable to our shareholders.  For exposures associated with capital expenditures, our primary objective in entering into currency derivatives is to reduce the volatility that changes in foreign currency exchange rates have on future cash flows.
 
 
14

 

Our derivatives consist primarily of currency forward contracts.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  Our maximum exposure to loss due to credit risk that we would incur if parties to the forward contracts failed completely to perform according to the terms of the contracts was equal to our carrying value of the forward contracts as of March 3, 2011.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, we monitor the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.  We have the following currency risk management programs:

Currency derivatives without hedge accounting designation :   We utilize a rolling hedge strategy with currency forward contracts that generally mature within 35 days to hedge our foreign currency exposure in monetary assets and liabilities.  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 dealers 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).  As of March 3, 2011 and September 2, 2010, total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

   
Notional Amount (1)
   
Fair Value of
 
Currency
 
(in U.S. Dollars)
   
Asset   (2)
   
(Liability)   (3)
 
                   
As of March 3, 2011
                 
Euro
  $ 133     $ 3     $ --  
Singapore dollar
    94       --       (1 )
Israel shekel
    57       --       --  
Yen
    54       --       --  
Malaysia ringgit
    24       --       --  
    $ 362     $ 3     $ (1 )
                         
As of September 2, 2010
                       
Euro
  $ 260     $ --     $ (5 )
Singapore dollar
    157       --       --  
Yen
    104       1       --  
    $ 521     $ 1     $ (5 )
                         
(1) Represents the face value of outstanding contracts
                       
(2) Included in other receivables
                       
(3) Included in other accounts payable and accrued expenses
                       

For currency forward contracts not designated as hedging instruments, we recognized gains of $7 million and $5 million for the second quarter and first six months of 2011, respectively, and losses of $24 million and $15 million for the second quarter and first six months of 2010, respectively, which were included in other operating income (expense).

Currency derivatives with cash flow hedge accounting designation:   We utilize currency forward contracts that mature within 12 months to hedge the foreign currency exposures of cash flow for some forecasted capital expenditures.  Foreign currency forward contracts are valued at fair values based on market-based observable inputs including foreign exchange spot and forward rates, interest rate and credit risk spread (referred to as Level 2).  For those derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives was included as a component of accumulated other comprehensive income (loss) in shareholders' equity.  The amount in the accumulated other comprehensive income (loss) for those cash flow hedges are reclassified into earnings in the same line items of consolidated statements of operations and in the same periods in which the underlying transaction affects earnings.  The ineffective or excluded portion of the realized and unrealized gain or loss was included in other operating income (expense).  As of March 3, 2011 and September 2, 2010, total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:
 
 
15

 

   
Notional Amount (1)
   
Fair Value of
 
Currency
 
(in U.S. Dollars)
   
Asset   (2)
   
(Liability)   (3)
 
                   
As of March 3, 2011
                 
Euro
  $ 420     $ 16     $ --  
Yen
    39       1       --  
    $ 459     $ 17     $ --  
                         
As of September 2, 2010
                       
Euro
  $ 196     $ 1     $ --  
Yen
    81       1       --  
    $ 277     $ 2     $ --  
                         
(1) Represents the face value of outstanding contracts
                       
(2) Included in other receivables
                       
(3) Included in other accounts payable and accrued expenses
                       

For the second quarter and first six months of 2011, we recognized $22 million and $28 million, respectively, of net derivative gains in other comprehensive income from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other operating income (expense) were not material in the second quarter and first six months of 2011.  In the first six months of 2011, no amounts were reclassified from other comprehensive income (loss) to earnings and the amount of net derivative gains included in other accumulated comprehensive income (loss) expected to be reclassified into earnings within the next 12 months is $4 million.


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).

Fair value measurements on a recurring basis: Assets measured at fair value on a recurring basis were as follows:

   
March 3, 2011
   
September 2, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                                 
Money market (1)
  $ 1,215     $ --     $ --     $ 1,215     $ 2,170     $ --     $ --     $ 2,170  
Certificates of deposit (2)
    --       441       --       441       --       705       --       705  
Marketable equity investments (3)
    28       --       --       28       19       --       --       19  
Assets held for sale (3)
    --       --       41       41       --       --       56       56  
    $ 1,243     $ 441     $ 41     $ 1,725     $ 2,189     $ 705     $ 56     $ 2,950  
                                                                 
(1) Included in cash   and equivalents.
 
(2) As of March 3, 2011, $106 million was included in cash   and equivalents and $335 million was included in restricted cash. As of September 2, 2010, $371 million was included in cash   and equivalents and $334 million was included in restricted cash.
 
(3) Included in other noncurrent assets.
 

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 primarily included semiconductor equipment and facilities.  Fair value for the semiconductor equipment is based on quotations obtained from equipment dealers, which consider the remaining useful life and configuration of the equipment and fair value of the facilities is determined based on sales of similar facilities and properties in comparable markets (Level 3).  Losses recognized in the second quarter and first six months of 2011 and 2010 due to fair value measurements using Level 3 inputs were de minimis.
 
 
16

 

Fair value of financial instruments :   The estimated fair value and carrying value of debt instruments (carrying value excludes the equity component of the 2014 Notes and the 2027 Notes which is classified in equity) were as follows:

   
March 3, 2011
   
September 2, 2010
 
   
Fair
Value
   
Carrying
Value
   
Fair
Value
   
Carrying
Value
 
                         
Convertible debt instruments
  $ 1,574     $ 1,064     $ 1,494     $ 1,288  
Other debt instruments
    682       676       1,071       1,072  

The fair value of our convertible debt instruments as of September 2, 2010 is based on quoted market prices in active markets (Level 1).  As of March 3, 2011, the fair value of our convertible 2013 Notes and 2027 Notes ($329 million and $213 million, respectively) were determined based on observable inputs of quoted market prices in markets with insufficient activity to be considered active and our stock price (Level 2).  Valuation of the 2013 Notes and 2027 Notes were classified as Level 2 in connection with our debt repurchase and exchange transactions in the first quarter of 2011.  The fair value of our other debt instruments was estimated based on discounted cash flows using inputs that are observable in the market or that could be derived from or corroborated with observable market data, including interest rates based on yield curves of similar debt issued by parties with credit ratings similar to ours (Level 2).  Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value.


Equity Plans

As of March 3, 2011, under our equity plans, we had an aggregate of 162.0 million shares of common stock reserved for issuance for stock options and restricted stock awards, of which 114.6 million shares were subject to outstanding awards and 47.4 million shares were available for future awards.  Awards are subject to terms and conditions as determined by our Board of Directors.

Stock options:   We granted 10.8 million and 14.9 million stock options during the second quarter and first six months of 2011, respectively, with weighted-average grant-date fair values per share of $4.71 and $4.46, respectively.  We granted 1.6 million and 15.7 million stock options during the second quarter and first six months of 2010, respectively, with weighted-average grant-date fair values per share of $5.04 and $4.13, respectively.

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 our stock and on historical volatility.  Beginning in 2009, the expected lives of options granted were based, in part, on historical experience and on the terms and conditions of the options.  Prior to 2009, the expected lives of options granted 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
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Average expected life in years
    5.03       5.19       5.07       5.11  
Weighted-average expected volatility
    55 %     56 %     56 %     60 %
Weighted-average risk-free interest rate
    2.1 %     2.5 %     1.8 %     2.3 %

Restricted stock and restricted stock units ("Restricted Stock Awards"):   As of March 3, 2011, there were 10.0 million shares of Restricted Stock Awards outstanding, of which 1.3 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.  Restricted Stock Awards granted for the second quarter and first six months of 2011 and 2010 were as follows:
 
 
17

 

   
Quarter ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Service-based awards
    3.1       --       4.3       1.8  
Performance-based awards
    --       --       1.2       1.1  
Weighed-average grant-date fair values per share
  $ 9.62       --     $ 8.74     $ 7.51  
 
Stock-based compensation expense:   Total compensation costs for our equity plans were as follows:

   
Quarter ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Stock-based compensation expense by caption:
                       
Cost of goods sold
  $ 6     $ 6     $ 10     $ 13  
Selling, general and administrative
    9       11       20       30  
Research and development
    4       5       8       10  
    $ 19     $ 22     $ 38     $ 53  
                                 
Stock-based compensation expense by type of award:
                               
Stock options
  $ 11     $ 11     $ 21     $ 19  
Restricted Stock Awards
    8       11       17       34  
    $ 19     $ 22     $ 38     $ 53  

As of March 3, 2011, $182 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards was expected to be recognized through the second quarter of 2015, resulting in a weighted-average period of 1.5 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 our U.S. operations.  (See "Income Taxes" note.)


Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

   
Quarter ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Samsung patent cross-license agreement
  $ (40 )   $ --     $ (240 )   $ --  
Restructure
    (17 )     (1 )     (13 )     (2 )
(Gain) loss on disposition of property, plant and equipment
    (16 )     (7 )     (16 )     (9 )
(Gain) loss from changes in currency exchange rates
    --       (2 )     7       19  
Other
    (3 )     (11 )     (5 )     (21 )
    $ (76 )   $ (21 )   $ (267 )   $ (13 )

In the first quarter of 2011, we entered into a 10-year patent cross-license agreement with Samsung Electronics Co. Ltd. ("Samsung").  For the second quarter and first six months of 2011, other operating income included gains of $40 million and $240 million, respectively, for cash received from Samsung under the agreement.  We received an additional $35 million from this agreement in March 2011, subsequent to our second quarter of 2011.  The license is a life-of-patents license for existing patents and applications, and a 10-year term license for all other patents.

 
18

 

Income Taxes

Income tax provision in the second quarter of 2011 included a charge to reduce net deferred tax assets by $19 million in connection with a change in tax rates.  Income tax provision in the second and first quarters of 2011 included charges of $7 million and $33 million, respectively, in connection with the Samsung agreement and also included taxes on our non-U.S. operations.  Income taxes in the second and first quarters of 2010 primarily reflected taxes on our non-U.S. operations and U.S. alternative minimum tax.  We have a valuation allowance for our net deferred tax asset associated with our U.S. operations.  Taxes attributable to U.S. operations in the second and first quarters of 2011 and 2010 were substantially offset by changes in the valuation allowance.


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 and convertible notes.  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 166.0 million and 167.5 million for the second quarter and first six months of 2011, respectively, and 98.3 million and 99.9 million for the second quarter and first six months of 2010, respectively.

   
Quarter ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Net income available to Micron shareholders – Basic
  $ 72     $ 365     $ 227     $ 569  
Net effect of assumed conversion of debt
    2       24       4       47  
Net income available to Micron shareholders – Diluted
  $ 74     $ 389     $ 231     $ 616  
                                 
Weighted-average common shares outstanding – Basic
    988.1       847.6       980.5       847.0  
Net effect of dilutive equity awards, escrow shares and assumed conversion of debt
    49.2       157.7       54.0       156.1  
Weighted-average common shares outstanding – Diluted
    1,037.3       1,005.3       1,034.5       1,003.1  
                                 
Earnings per share:
                               
Basic
  $ 0.07     $ 0.43     $ 0.23     $ 0.67  
Diluted
    0.07       0.39       0.22       0.61  
 
 
19

 
 
Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

   
Quarter Ended
   
Six Months Ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Net income
  $ 75     $ 379     $ 247     $ 581  
Other comprehensive income (loss), net of tax:
                               
Net gain (loss) on foreign currency translation adjustment
    41       3       59       11  
Net unrealized gain (loss) on investments
    4       4       7       4  
Net gain (loss) on derivatives
    22       --       28       --  
Pension liability adjustment
    --       1       1       1  
Total other comprehensive income (loss)
    67       8       95       16  
Comprehensive income (loss)
    142       387       342       597  
Comprehensive (income) loss attributable to noncontrolling interests
    (4 )     (14 )     (25 )     (12 )
Comprehensive income (loss) attributable to Micron
  $ 138     $ 373     $ 317     $ 585  


Consolidated Variable Interest Entities

NAND Flash joint ventures with Intel ("IM Flash"):   We have two joint ventures with Intel: IMFT, formed in 2006 and IMFS, formed in 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, the number of which adjusts depending on the parties' respective ownership interests.  We and Intel initially appointed an equal number of managers to each of the boards.  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 disclosure due to the similarity of their ownership structure, function, operations and the way our management reviews the results of their operations.  The partners' ownership percentages are based on contributions to the partnership.  As of March 3, 2011, we owned 51% and Intel owned 49% of IMFT.  In the first quarter of 2011, we contributed $392 million to IMFS and Intel did not make any contribution, increasing our ownership interest in IMFS to 71% from 57%.  In the second quarter of 2011, we contributed $343 million to IMFS and Intel did not make any contribution, increasing our ownership interest in IMFS to 78%.  In March 2011, subsequent to the end of our second quarter of 2011, we contributed $409 million to IMFS, increasing our ownership interest in IMFS to 82%.

IM Flash manufactures NAND Flash memory products using designs we developed with Intel.  We generally share equally with Intel the product design and other research and development ("R&D") costs.  As a result, R&D expenses were reduced by reimbursements from Intel of $23 million and $46 million for the second quarter and first six months of 2011, respectively, and by $29 million and $55 million for the second quarter and first six months of 2010, respectively.

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 $202 million and $411 million for the second quarter and first six months of 2011, respectively, and were $172 million and $365 million for the second quarter and first six months of 2010, respectively.  IM Flash receivables and payables related to Intel were as follows:
 
As of
 
March 3, 2011
   
September 2, 2010
 
             
Receivables from Intel for net sales
  $ 115     $ 128  
Payables to Intel for various services
    1       2  
 
 
20

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

   
Quarter Ended
   
Six Months Ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
IM Flash distributions to Micron
  $ 53     $ 88     $ 104     $ 179  
IM Flash distributions to Intel
    50       84       99       172  
Micron contributions to IM Flash
    343       25       735       25  

In 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore.  Shortly afterwards, we and Intel agreed to suspend tooling and the ramp of production at this facility due to industry conditions.  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 tool installations that commenced in the first quarter of 2011.  The level of our future capital contributions to IM Flash will depend on the extent to which Intel participates in future IM Flash capital calls.  Although our ownership interest in IMFS changed at the time we made such contributions, our share of the operating costs and supply from IMFS adjusts to changes in our ownership share, with generally a 12-month lag (depending on the status of IMFS as of such date) from the date of the applicable ownership change.  Accordingly, we anticipate that our share of IMFS costs and supply will increase from 53% as of March 3, 2011 to our current ownership interest in IMFS (82% as of March 25, 2011).  Changes in IMFS ownership interests do not affect our NAND Flash R&D cost-sharing agreement with Intel.
 
Total IM Flash assets and liabilities included in our consolidated balance sheets are as follows:

As of
 
March 3, 2011
   
September 2, 2010
 
             
Assets
           
Cash and equivalents
  $ 352     $ 246  
Receivables
    176       154  
Inventories
    190       160  
Other current assets
    10       8  
Total current assets
    728       568  
Property, plant and equipment, net
    3,532       2,894  
Other noncurrent assets
    72       57  
Total assets
  $ 4,332     $ 3,519  
                 
Liabilities
               
Accounts payable and accrued expenses
  $ 380     $ 140  
Deferred income
    126       127  
Equipment purchase contracts
    29       8  
Current portion of long-term debt
    8       7  
Total current liabilities
    543       282  
Long-term debt
    61       62  
Other noncurrent liabilities
    3       4  
Total liabilities
  $ 607     $ 348  
                 
Amounts exclude intercompany balances that are eliminated in our consolidated balance sheets.
 

Our ability to access IM Flash's cash and marketable investment securities to finance our other operations is subject to agreement by the joint venture partners.  The creditors of each IM Flash entity have recourse only to the assets of each of the respective IM Flash entities and do not have recourse to any other of our assets.
 
 
21

 
 
MP Mask Technology Center, LLC ("MP Mask"):   In 2006, we formed a joint venture, MP Mask, with Photronics to produce photomasks for leading-edge and advanced next generation semiconductors.  At inception and through March 3, 2011, we owned 50.01% and Photronics owned 49.99% of MP Mask.  We purchase a substantial majority of the reticles produced by MP Mask pursuant to a supply arrangement.  In connection with the formation of the joint venture, we received $72 million in 2006 in exchange for entering into a license agreement with Photronics, which is being recognized over the term of the 10-year agreement.  As of March 3, 2011, deferred income and other noncurrent liabilities included an aggregate of $37 million related to this agreement.

Total MP Mask assets and liabilities included in our consolidated balance sheets are as follows:

As of
 
March 3, 2011
   
September 2, 2010
 
             
Current assets
  $ 41     $ 35  
Noncurrent assets (primarily property, plant and equipment)
    136       85  
Current liabilities
    53       6  
                 
Amounts exclude intercompany balances that are eliminated in our consolidated balance sheets.
 

The creditors of MP Mask have recourse only to the assets of MP Mask and do not have recourse to any other of our assets.


TECH Semiconductor Singapore Pte. Ltd.

Since 1998, we have participated in TECH Semiconductor Singapore Pte. Ltd. ("TECH"), a semiconductor memory manufacturing joint venture in Singapore with Canon Inc. ("Canon") and Hewlett-Packard Singapore (Private) Limited ("HP").  In December 2010 and January 2011, we acquired HP's and Canon's interests, respectively, in two separate transactions for an aggregate of $159 million.  In connection therewith, noncontrolling interests in subsidiaries decreased by $226 million and additional capital increased by $67 million.  As a result of these transactions, our ownership interest in TECH increased during the second quarter of 2011 from 87% to 100%.

In the second quarter of 2010, we purchased shares of TECH for $80 million, which increased our ownership from approximately 85% to approximately 87% and increased additional capital by $10 million.  The effects of changes in our ownership interest in TECH on total Micron shareholders' equity are as follows:

   
Quarter Ended
   
Six Months Ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Net income attributable to Micron
  $ 72     $ 365     $ 227     $ 569  
Increase in Micron's additional capital for transfers from noncontrolling interests
    67       10       67       10  
Change from net income attributable to Micron and transfers from noncontrolling interests
  $ 139     $ 375     $ 294     $ 579  

 
22

 

Segment Information

In the second quarter of 2011, we reorganized our business to better align with our markets.  All prior period amounts have been retrospectively adjusted to reflect this reorganization.  Factors used to identify our segments include, among others, products, technologies and customers.  Segment information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision makers.  After our reorganization, we have the following four reportable segments:

 
DRAM Solutions Group ("DSG"): Includes high-volume DRAM products sold to the PC, consumer electronics, networking and server markets.
 
NAND Solutions Group ("NSG"):   Includes high-volume NAND Flash products sold into data storage, personal music players, and portions of the computing markets, as well as NAND Flash products sold to Intel through our consolidated IM Flash joint ventures.
 
Wireless Solutions Group ("WSG"):   Includes DRAM, NAND Flash and NOR Flash products, including multi-chip packages, sold to the mobile device market.
 
Embedded Solutions Group ("ESG"):   Includes DRAM, NAND Flash and NOR Flash products sold into automotive and industrial applications, as well as NOR and NAND flash sold to consumer electronics, networking, PC and server markets.

Our other operations do not meet the quantitative thresholds of a reportable segment and are reported under All Other.  All Other includes our CMOS image sensor, microdisplay and solar operations.

For 2011, certain operating expenses that are directly associated with the activities of a specific reportable segment are charged to that segment.  Other indirect operating expenses are generally allocated to the reportable segments based on their respective percentage of total cost of goods sold or forecast wafer production.  Prior to 2011, operating expenses are allocated to the reportable segments based on their respective percentage of total cost of goods sold, as certain historical forecast data is not available.

We do not identify or report internally asset or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other nonoperating income/expense or taxes to operating segments.  There are no differences in the accounting policies for segment reporting and our consolidated results of operations.
 
   
Quarter Ended
   
Six months ended
 
   
March 3, 2011
   
March 4, 2010
   
March 3, 2011
   
March 4, 2010
 
                         
Net sales:
                       
DSG
  $ 841     $ 1,204     $ 1,744     $ 2,152  
NSG
    552       507       1,054       1,023  
WSG
    510       72       1,021       163  
ESG
    252       87       518       153  
All Other
    102       91