Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 04/09/2012 16:09:25)

 
 
 
 
 
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 March 1, 2012

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o

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

The number of outstanding shares of the registrant's common stock as of April 2, 2012, was 989,627,195 .
 
 
 
 
 



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 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Net sales
 
$
2,009

 
$
2,257

 
$
4,099

 
$
4,509

Cost of goods sold
 
1,799

 
1,822

 
3,584

 
3,550

Gross margin
 
210

 
435

 
515

 
959

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
174

 
146

 
325

 
286

Research and development
 
222

 
186

 
452

 
371

Other operating (income) expense, net
 
19

 
(76
)
 
25

 
(267
)
Operating income (loss)
 
(205
)
 
179

 
(287
)
 
569

 
 
 
 
 
 
 
 
 
Interest income
 
2

 
7

 
4

 
15

Interest expense
 
(35
)
 
(28
)
 
(70
)
 
(66
)
Other non-operating income (expense), net
 
38

 

 
38

 
(114
)
 
 
(200
)
 
158

 
(315
)
 
404

 
 
 
 
 
 
 
 
 
Income tax provision
 
(9
)
 
(35
)
 
(7
)
 
(83
)
Equity in net income (loss) of equity method investees, net of tax
 
(73
)
 
(48
)
 
(147
)
 
(74
)
Net income (loss)
 
(282
)
 
75

 
(469
)
 
247

 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 

 
(3
)
 

 
(20
)
Net income (loss) attributable to Micron
 
$
(282
)
 
$
72

 
$
(469
)
 
$
227

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 
 
 
Basic
 
$
(0.29
)
 
$
0.07

 
$
(0.48
)
 
$
0.23

Diluted
 
(0.29
)
 
0.07

 
(0.48
)
 
0.22

 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
982.8

 
988.1

 
982.1

 
980.5

Diluted
 
982.8

 
1,037.3

 
982.1

 
1,034.5









See accompanying notes to consolidated financial statements.

1


MICRON TECHNOLOGY, INC.

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

As of
 
March 1,
2012
 
September 1,
2011
Assets
 
 
 
 
Cash and equivalents
 
$
2,094

 
$
2,160

Receivables
 
1,241

 
1,497

Inventories
 
2,081

 
2,080

Other current assets
 
243

 
95

Total current assets
 
5,659

 
5,832

Intangible assets, net
 
400

 
414

Property, plant and equipment, net
 
7,357

 
7,555

Equity method investments
 
335

 
483

Other noncurrent assets
 
388

 
468

Total assets
 
$
14,139

 
$
14,752

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
1,457

 
$
1,830

Deferred income
 
364

 
443

Equipment purchase contracts
 
131

 
67

Current portion of long-term debt
 
150

 
140

Total current liabilities
 
2,102

 
2,480

Long-term debt
 
2,165

 
1,861

Other noncurrent liabilities
 
513

 
559

Total liabilities
 
4,780

 
4,900

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 989.4 shares issued and outstanding (984.3 as of September 1, 2011)
 
99

 
98

Additional capital
 
8,658

 
8,610

Accumulated deficit
 
(839
)
 
(370
)
Accumulated other comprehensive income
 
68

 
132

Total Micron shareholders' equity
 
7,986

 
8,470

Noncontrolling interests in subsidiaries
 
1,373

 
1,382

Total equity
 
9,359

 
9,852

Total liabilities and equity
 
$
14,139

 
$
14,752










See accompanying notes to consolidated financial statements.

2



MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six months ended
 
March 1,
2012
 
March 3,
2011
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
(469
)
 
$
247

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation expense and amortization of intangible assets
 
1,133

 
1,003

Amortization of debt discount and other costs
 
34

 
30

Equity in net (income) losses of equity method investees, net of tax
 
147

 
74

Stock-based compensation
 
50

 
38

Loss on extinguishment of debt
 

 
111

Change in operating assets and liabilities:
 
 

 
 

Receivables
 
225

 
154

Inventories
 
(1
)
 
(196
)
Accounts payable and accrued expenses
 
(40
)
 
94

Deferred income
 
(74
)
 
(11
)
Other
 
(27
)
 
(3
)
Net cash provided by operating activities
 
978

 
1,541

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant and equipment
 
(1,089
)
 
(1,189
)
Loan to Inotera
 
(133
)
 

Additions to equity method investments
 
(7
)
 
(11
)
Acquisition of noncontrolling interests in TECH
 

 
(159
)
Proceeds from sales of property, plant and equipment
 
48

 
96

Return of equity method investment
 

 
48

Other
 
(2
)
 
(23
)
Net cash used for investing activities
 
(1,183
)
 
(1,238
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from equipment sale-leaseback transactions
 
340

 
95

Cash received from noncontrolling interests
 
138

 
4

Distributions to noncontrolling interests
 
(147
)
 
(99
)
Repayments of debt
 
(101
)
 
(812
)
Payments on equipment purchase contracts
 
(86
)
 
(221
)
Other
 
(5
)
 
1

Net cash provided by (used for) financing activities
 
139

 
(1,032
)
 
 
 
 
 
Net decrease in cash and equivalents
 
(66
)
 
(729
)
Cash and equivalents at beginning of period
 
2,160

 
2,913

Cash and equivalents at end of period
 
$
2,094

 
$
2,184

 
 
 
 
 
Supplemental disclosures
 
 

 
 

Income taxes refunded (paid), net
 
$
29

 
$
(60
)
Interest paid, net of amounts capitalized
 
(28
)
 
(35
)
Noncash investing and financing activities:
 
 

 
 

Equipment acquisitions on contracts payable and capital leases
 
533

 
187

Exchange of convertible notes
 

 
175



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 1, 2011. 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.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our second quarters of fiscal 2012 and 2011 ended on March 1, 2012 and March 3, 2011, respectively. Our fiscal 2011 ended on September 1, 2011. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 1, 2011.


Variable Interest Entities

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

Unconsolidated Variable Interest Entities

Inotera – Inotera Memories, Inc. ("Inotera") is a VIE because of the terms of its supply agreement with us and our partner, Nanya Technology Corporation ("Nanya"). We have determined that we do not have power to direct the activities of Inotera that most significantly impact its 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 interest in Inotera under the equity method.

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

EQUVO – EQUVO HK Limited (“EQUVO”) is a special purpose entity created to facilitate an equipment sale-leaseback financing transaction between us and a consortium of financial institutions. Neither we nor the financial institutions have an equity interest in EQUVO. EQUVO is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from the financial institutions and because the third-party equity holder lacks characteristics of a controlling financial interest. By design, the EQUVO arrangement is merely a financing vehicle and we do not bear any significant risks from variable interests with EQUVO. Therefore, we have determined that we do not have the power to direct the activities of EQUVO that impact its economic performance and we do not consolidate EQUVO.


4



For further information regarding our VIEs that we account for under the equity method, see "Equity Method Investments" note.

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 or 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 82% ownership interest in IMFS as of March 1, 2012, we had 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.

On February 27, 2012, we entered into agreements with Intel relating to our IMFS and IMFT joint ventures. The transactions contemplated by such agreements became effective on April 6, 2012 . For further information regarding the effect of these agreements, see "IM Flash Agreements" note.

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 or Photronics for any additional cash requirements.  We determined that we have the power to direct the activities of MP Mask that most significantly impact its economic performance, primarily because (1) of our tie-breaking voting rights over key operating decisions and (2) 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.

For further information regarding our consolidated VIEs, see "Consolidated Variable Interest Entities" note.


Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. We are required to adopt this standard in the third quarter of 2012. We do not expect this adoption to have a material impact on our financial statements.

In June 2011, the FASB issued a new accounting standard on the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We are required to adopt this standard as of the beginning of 2013. The new standard also required presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented, which was indefinitely deferred by an update issued by the FASB in December 2011. The adoption of these standards will only impact the presentation of our financial statements.


Receivables

As of
 
March 1,
2012
 
September 1,
2011
Trade receivables (net of allowance for doubtful accounts of $2 and $3, respectively)
 
$
913

 
$
1,105

Income and other taxes
 
98

 
137

Related party receivables
 
83

 
72

Other
 
147

 
183

 
 
$
1,241

 
$
1,497


5




As of March 1, 2012 and September 1, 2011 , related party receivables included $74 million and $67 million , respectively, due from Aptina Imaging Corporation ("Aptina") primarily for sales of image sensor products under a wafer supply agreement.  (See "Equity Method Investments" note.)

As of March 1, 2012 and September 1, 2011 , other receivables included $26 million and $34 million , respectively, due from Intel for amounts related to NAND Flash product design and process development activities under cost-sharing agreements.  As of March 1, 2012 and September 1, 2011 , other receivables also included $25 million and $25 million , respectively, due from Nanya for amounts related to DRAM product design and process development activities under a cost-sharing agreement. (See "Consolidated Variable Interest Entities" note and "Equity Method Investments" note.)


Inventories

As of
 
March 1,
2012
 
September 1,
2011
Finished goods
 
$
681

 
$
596

Work in process
 
1,245

 
1,342

Raw materials and supplies
 
155

 
142

 
 
$
2,081

 
$
2,080



Intangible Assets

As of
 
March 1, 2012
 
September 1, 2011
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
590

 
$
(228
)
 
$
571

 
$
(203
)
Customer relationships
 
127

 
(90
)
 
127

 
(82
)
Other
 
1

 

 
1

 

 
 
$
718

 
$
(318
)
 
$
699

 
$
(285
)

During the first six months of 2012 and 2011 , we capitalized $30 million and $24 million , respectively, for product and process technology with weighted-average useful lives of 9 years.

Amortization expense for intangible assets was $22 million and $44 million for the second quarter and first six months of 2012 and $ 18 million and $37 million for the second quarter and first six months of 2011 , respectively.  Annual amortization expense is estimated to be $88 million for 2012 , $83 million for 2013 , $75 million for 2014 , $57 million for 2015 and $49 million for 2016 .


Property, Plant and Equipment

As of
 
March 1,
2012
 
September 1,
2011
Land
 
$
92

 
$
92

Buildings
 
4,602

 
4,481

Equipment
 
15,285

 
14,735

Construction in progress
 
94

 
155

Software
 
311

 
293

 
 
20,384

 
19,756

Accumulated depreciation
 
(13,027
)
 
(12,201
)
 
 
$
7,357

 
$
7,555


6




Depreciation expense was $547 million and $1,089 million for the second quarter and first six months of 2012 , respectively, and $485 million and $966 million for the second quarter and first six months of 2011 , respectively.

Other noncurrent assets included buildings, equipment, and other assets classified as held for sale of $30 million as of March 1, 2012 and $35 million as of September 1, 2011 .


Equity Method Investments

As of
 
March 1, 2012
 
September 1, 2011
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$
259

 
29.7
%
 
$
388

 
29.7
%
Transform
 
75

 
50.0
%
 
87

 
50.0
%
Other
 
1

 
Various

 
8

 
Various

 
 
$
335

 
 

 
$
483

 
 


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 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Inotera:
 
 
 
 
 
 
 
 
Equity method loss
 
$
(64
)
 
$
(45
)
 
$
(136
)
 
$
(71
)
Inotera Amortization
 
12

 
12

 
24

 
24

Other
 
(4
)
 
(2
)
 
(7
)
 
(2
)
 
 
(56
)
 
(35
)
 
(119
)
 
(49
)
Transform
 
(15
)
 
(9
)
 
(22
)
 
(16
)
Other
 
(2
)
 
(4
)
 
(6
)
 
(9
)
 
 
$
(73
)
 
$
(48
)
 
$
(147
)
 
$
(74
)

Our maximum exposure to loss from our involvement with our equity method investments that are VIEs was as follows:

As of
 
March 1,
2012
Inotera
 
$
354

Transform
 
76


The maximum exposure to loss primarily included our investment balance 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. Through the second quarter of 2012, we had rights and obligations to purchase a portion of Inotera's wafer production capacity under the Inotera Supply Agreement. As a result of our March 2012 equity contribution to Inotera, our obligation to purchase Inotera's capacity may increase when additional output results from Inotera's capital investments enabled by our equity investment.

Inotera

We have partnered with Nanya in Inotera, a Taiwanese DRAM memory company.  We acquired our initial ownership interest in Inotera in the first quarter of 2009.  As of March 1, 2012 , we held a 29.7% ownership interest in Inotera, Nanya held a 30.4% ownership interest and the remaining ownership interest was publicly held.


7



The carrying value of our initial investment in Inotera was less than our proportionate share of its equity.  This difference is being amortized as a credit to earnings through equity in net income (loss) of equity method investees (the "Inotera Amortization").  As of March 1, 2012 , $50 million of Inotera Amortization remained to be recognized, of which $25 million is scheduled to be amortized in the remainder of 2012 with the remaining amount to be amortized through 2034.

Because of significant market declines in the selling price of DRAM, Inotera incurred net losses of $737 million for its year ended December 31, 2011. Also, Inotera's current liabilities exceeded its current assets by $2.2 billion as of December 31, 2011, which exposes Inotera to liquidity risk. Inotera's management has developed plans to improve its liquidity. There can be no assurance that Inotera's plans to improve its liquidity will be successful.

On December 20, 2011, we loaned $133 million to Inotera under a 90-day note with a stated annual interest rate of 2% to facilitate the purchase of capital equipment necessary to implement new process technology. The loan was repaid to us with accrued interest in March 2012, subsequent to the end of our second quarter of 2012. Also, in March 2012, subsequent to the end of our second quarter of 2012, we contributed $170 million to Inotera, which increased our ownership percentage from 29.7% to 39.7% .

Through the second quarter of 2012, we had a supply agreement with Inotera, under which Nanya was also a party, for the rights and obligations to purchase 50% of Inotera's wafer production capacity (the "Inotera Supply Agreement"). As a result of our March 2012 equity contribution to Inotera, we expect to receive a higher share of Inotera's 30-nanometer output when it becomes available from Inotera capital investments enabled by our $170 million equity investment. Our cost of wafers purchased under the Inotera Supply Agreement is based on a margin-sharing formula among Nanya, Inotera, and us. Under such formula, all parties' manufacturing costs related to wafers supplied by Inotera, as well as our and Nanya's revenue for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers acquired from Inotera. Under the Inotera Supply Agreement, we purchased $142 million and $298 million of DRAM products in the second quarter and first six months of 2012, respectively, and $167 million and $304 million of DRAM products in the second quarter and first six months of 2011, respectively. In addition, under the Inotera Supply Agreement, we accrued a liability and recognized a loss on our purchase commitment of $19 million in the second quarter of 2012 and $40 million in the first quarter of 2012.

As of March 1, 2012 and September 1, 2011 , there were gains of $46 million and $65 million , respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.  

As of March 1, 2012 , based on the closing trading price of Inotera's shares in an active market, the market value of our equity interest in Inotera was $404 million , which exceeded our net carrying value of $213 million . The net carrying value is our investment balance of $259 million less the cumulative translation adjustments in accumulated other comprehensive income (loss) of $46 million .

Under a cost-sharing arrangement, we share equally in DRAM development costs with Nanya. As a result, our research and development ("R&D") costs were reduced by $36 million and $73 million for the second quarter and first six months of 2012, respectively, and $33 million and $63 million for the second quarter and first six months of 2011, respectively.  In addition, we received $1 million and $4 million of royalty revenue for the second quarter and first six months of 2012, respectively, and $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.

Transform

In the second quarter of 2010, we acquired a 50% interest in Transform, a developer, manufacturer and marketer of photovoltaic technology and solar panels, from Origin.  As of March 1, 2012 , we and Origin each held a 50% ownership interest in Transform.  During the second quarter and first six months of 2012, we and Origin each contributed $4 million and $7 million , respectively, of cash to Transform, and for the second quarter and first six months of 2011, we and Origin each contributed $4 million and $11 million , respectively, of cash to Transform.  Our results of operations for the second quarter and first six months of 2012 included $4 million and $8 million , respectively, of net sales, which approximated our cost, for transition services provided to Transform. For the second quarter and first six months of 2011, our results of operations included $6 million and $11 million , respectively, of net sales, which approximated our cost, for transition services provided to Transform.


8



Other

Included in other equity method investments is our 35% equity interest in Aptina. During the second quarter of 2012, the amount of cumulative loss we recognized from our investment in Aptina reduced our investment balance to zero and we ceased recognizing our proportionate share of Aptina's losses. We will resume recognizing our proportionate share of Aptina's earnings only when our proportionate share of their earnings exceeds the amount of cumulative net losses not recognized.

We manufacture components for CMOS image sensors for Aptina under a wafer supply agreement.  For the second quarter and first six months of 2012, we recognized net sales of $99 million and $193 million , respectively, from products sold to Aptina. For the second quarter and first six months of 2011, we recognized net sales of $82 million and $141 million , respectively, from products sold to Aptina. Revenue on our sales to Aptina approximated costs.


Accounts Payable and Accrued Expenses

As of
 
March 1,
2012
 
September 1,
2011
Accounts payable
 
$
806

 
$
1,187

Salaries, wages and benefits
 
276

 
304

Related party payables
 
118

 
141

Income and other taxes
 
37

 
30

Other
 
220

 
168

 
 
$
1,457

 
$
1,830


As of March 1, 2012 and September 1, 2011 , related party payables included $118 million and $139 million , respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement.

As of March 1, 2012 and September 1, 2011 , other accounts payable and accrued expenses included $7 million and $17 million , respectively, 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.)


Debt

As of
 
March 1,
2012
 
September 1,
2011
2014 convertible senior notes, due June 2014 at stated rate of 1.875%, effective rate of 7.9%, net of discount of $112 and $134, respectively
 
$
837

 
$
815

Capital lease obligations, due in periodic installments through August 2050 at 5.0% and 6.1%, respectively
 
702

 
423

2031A convertible senior notes, due August 2031 at stated rate of 1.5%, effective rate of 6.5%, net of discount of $85 and $90, respectively
 
260

 
255

2031B convertible senior notes, due August 2031 at stated rate of 1.875%, effective rate of 7.0%, net of discount of $106 and $111, respectively
 
239

 
234

2013 convertible senior notes, due October 2013 at stated rate of 4.25%
 
139

 
139

2027 convertible senior notes, due June 2027 at stated rate of 1.875%, effective rate of 6.9%, net of discount of $37 and $40, respectively
 
138

 
135

 
 
2,315

 
2,001

Less current portion
 
(150
)
 
(140
)
 
 
$
2,165

 
$
1,861



9



In the second quarter of 2012, we received $230 million in proceeds from equipment sales-leaseback transactions and as a result recorded capital lease obligations aggregating $230 million at a weighted-average effective interest rate of 3.9% , payable in periodic installments through February 2016 . In the first six months of 2012, we received $340 million in proceeds from equipment sales-leaseback transactions and as a result recorded capital lease obligations aggregating $340 million at a weighted-average effective interest rate of 4.0% , payable in periodic installments through February 2016 .

Debt Restructure

In the first quarter of 2011, in connection with a series of debt restructure transactions with certain holders of our convertible notes, we recognized a loss of $111 million as follows:

$15 million on the exchange of $175 million in aggregate principal amount of our 2014 convertible senior notes (the "2014 Notes") for $175 million in aggregate principal amount of new 2027 convertible senior notes;
$17 million (including transaction fees) on the repurchase of $176 million in aggregate principal amount of our 2014 Notes for $171 million in cash; and
$79 million (including transaction fees) on the repurchase of $91 million in aggregate principal amount of our 2013 convertible senior notes for $166 million in cash.

Debt Redemption Notice

On April 5, 2012, we provided the holders of our 2013 convertible senior notes written notice of redemption on June 4, 2012. The redemption price will equal the $139 million principal amount of the notes, plus accrued and unpaid interest and a "make-whole premium" equal to the present value of the remaining scheduled interest payments on the notes from the redemption to maturity (October 15, 2013). The conversion rate for these notes is 196.7052 shares of common stock per $1,000 principal amount (approximately $5.08 per share) and up to 27.3 million shares may be issued if some or all of the holders elect to convert their notes to shares.


Contingencies

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

Patent Matters

As is typical in the semiconductor and other high 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.

We are engaged in litigation with Rambus, Inc. ("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 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 and/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. On May 13, 2011, the Federal Circuit affirmed Judge Robinson's finding of spoliation, but vacated the dismissal sanction and remanded the case to the Delaware District Court for analysis of the remedy based on the Federal Circuit's decision. On January 13, 2006, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that certain of our DDR2, DDR3, RLDRAM and RLDRAM II products infringe as many as fourteen Rambus patents and seeking monetary damages, treble damages, and injunctive relief. The Northern District of California Court stayed the trial of the patent phase of the Northern District of California case upon appeal of the Delaware spoliation issue to the Federal Circuit.


10



On March 6, 2009, Panavision Imaging, LLC filed suit against us and Aptina Imaging Corporation, then a wholly-owned subsidiary, 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 for indefiniteness. On March 10, 2011, claims relating to the remaining three patents in suit were dismissed with prejudice. Panavision subsequently filed a motion for reconsideration of the Court's decision regarding invalidity of the first patent, and we filed a motion for summary judgment of non-infringement of such patent. On July 8, 2011, the Court issued an order that rescinded its prior indefiniteness decision, and held that the disputed term does not render the claims in suit indefinite. On February 3, 2012, the Court granted our motion for summary judgment of non-infringement. On March 20, 2012, we executed a settlement agreement with Panavision pursuant to which the parties agreed to a settlement and release of all claims and a dismissal with prejudice of the litigation, which did not have a material effect on our business, results of operations or financial condition.

On September 1, 2011, HSM Portfolio LLC and Technology Properties Limited LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and seventeen other defendants. The complaint alleges that certain of our DRAM and image sensor products infringe two U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On September 9, 2011, Advanced Data Access LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas against us and seven other defendants. On November 16, 2011, Advanced Data Access filed an amended complaint. The amended complaint alleges that certain of our DRAM products infringe two U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On September 14, 2011, Smart Memory Solutions LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and Winbond Electronics Corporation of America.  The complaint alleges that certain of our NOR Flash products infringe a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs.

On December 5, 2011, the Board of Trustees for the University of Illinois filed a patent infringement action against us in the U.S. District Court for the Central District of Illinois. The complaint alleges that unspecified semiconductor products of ours infringe three U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On March 26, 2012, Semiconductor Technologies, LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Marshall) against us. The complaint alleges that certain of our DRAM products infringe five U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

Among other things, the above lawsuits pertain to certain of our SDRAM, DDR SDRAM, DDR2 SDRAM, DDR3 SDRAM, RLDRAM, NOR Flash and image sensor products, which account for a significant portion of our net sales.

We are unable to predict the outcome of assertions of infringement made against us and therefore cannot estimate the range of possible loss. A 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.

Antitrust Matters

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers which alleged 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 alleged 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 sought a judgment for damages of approximately $3.9 billion, joint and several liability, trebling of damages awarded, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys' fees and costs. Trial began on June 20, 2011, and the case went to the jury on September 21, 2011. On November 16, 2011, the jury found for us on all claims. On April 2, 2012, Rambus filed a notice of appeal with the Superior Court.


11



At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging a conspiracy to increase DRAM prices in violation of federal and state antitrust laws and state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys' fees. A number of these cases 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 approximately $67 million in aggregate in three equal installments over a two-year period. As of March 1, 2012, we have paid $45 million into an escrow account in accordance with the settlement agreement.

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 (British Columbia) 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, and on November 16, 2011, the Quebec Court of Appeal also reversed the denial of class certification and remanded the cases for further proceedings.  

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 alleged a conspiracy to increase DRAM prices 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 sought joint and several damages, trebled, as well as restitution, disgorgement, attorneys' fees, costs and injunctive relief. On March 23, 2012, we entered into a settlement agreement with Oracle pursuant to which we agreed to make a payment of $58 million to Oracle for a settlement and full release of all claims and a dismissal with prejudice of the litigation.

We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss, except as noted in the U.S. indirect purchasers cases and Oracle 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.

Commercial Matters

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda AG ("Qimonda") insolvency proceedings, filed suit against us and Micron Semiconductor B.V., our Netherlands subsidiary, in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between us and Qimonda in fall 2008 pursuant to which we purchased all of Qimonda's shares of Inotera Memories, Inc. and seeks an order requiring us to retransfer the Inotera shares to the Qimonda estate. The complaint also seeks to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross license between us and Qimonda entered into at the same time as the share purchase agreement. A hearing scheduled to begin on November 9, 2011 was continued and has not yet been rescheduled. We are unable to predict the outcome of this lawsuit and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera shares or equivalent monetary damages and the termination of the patent cross license, which could have a material adverse effect on our business, results of operation or financial condition.


12



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.


Micron Shareholders' Equity and Noncontrolling Interests in Subsidiaries

Changes in the components of equity were as follows:

 
 
Six Months Ended March 1, 2012
 
Six Months Ended March 3, 2011
 
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
Beginning balance
 
$
8,470

 
$
1,382

 
$
9,852

 
$
8,020

 
$
1,796

 
$
9,816

 
 


 


 
 
 


 


 
 
Net income (loss)
 
(469
)
 

 
(469
)
 
227

 
20

 
247

Other comprehensive income (loss)
 
(64
)
 

 
(64
)
 
90

 
5

 
95

Comprehensive income (loss)
 
(533
)
 

 
(533
)
 
317

 
25

 
342

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interests in TECH
 

 

 

 
67

 
(226
)
 
(159
)
Net contribution from (distributions to) noncontrolling interests
 

 
(9
)
 
(9
)
 

 
(95
)
 
(95
)
Issuance and repurchase of convertible debts
 

 

 

 
13

 

 
13

Capital and other transactions attributable to Micron
 
49

 

 
49

 
45

 

 
45

Ending balance
 
$
7,986

 
$
1,373

 
$
9,359

 
$
8,462

 
$
1,500

 
$
9,962



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, shekel, Singapore dollar and yen.  We are also exposed to currency exchange rate risk for capital expenditures, primarily denominated in the euro and yen.  We use derivative instruments to manage our exposures to changes in currency exchange rates.  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 currency exchange rates have on our earnings.  For exposures associated with capital expenditures, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows.

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 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 1, 2012 , as listed in the tables below under asset fair values.  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:


13



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 exposure to changes in currency exchange rates.  At the end of each reporting period, monetary assets and liabilities held or denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  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 gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

 
 
Notional Amount (1) (in U.S. Dollars)
 
Fair Value of
Currency
 
 
Asset   (2)
 
(Liability)   (3)
As of March 1, 2012:
 
 
 
 
 
 
Singapore dollar
 
$
176

 
$

 
$

Euro
 
170

 
2

 
(2
)
Shekel
 
63

 

 
(1
)
Yen
 
21

 

 
(1
)
Other
 
41

 

 

 
 
$
471

 
$
2

 
$
(4
)
 
 
 
 
 
 
 
As of September 1, 2011:
 
 

 
 

 
 

Singapore dollar
 
$
210

 
$

 
$

Euro
 
301

 
3

 

Shekel
 
98

 

 
(2
)
Yen
 
165

 
3

 

Other
 
50

 

 

 
 
$
824

 
$
6

 
$
(2
)
(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 without hedge accounting designation, we recognized gains of $3 million and losses of $17 million for the second quarter and first six months of 2012 , respectively, and gains of $7 million and $5 million for the second quarter and first six months of 2011 , respectively, which were included in other operating income (expense).

Currency Derivatives with Cash Flow Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months to hedge the exposure of changes in cash flows from changes in currency exchange rates for certain forecasted capital expenditures.  Currency forward contracts are valued at their fair values based on market-based observable inputs including currency 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 amounts in accumulated other comprehensive income (loss) for those cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operations and in the same periods in which the underlying transactions affect earnings.  The ineffective or excluded portion of the realized and unrealized gain or loss is included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:


14



 
 
Notional Amount (1)   (in U.S. Dollars)
 
Fair Value of
Currency
 
 
Asset   (2)
 
(Liability)   (3)
As of March 1, 2012:
 
 
 
 
 
 
Yen
 
$
12

 
$

 
$
(1
)
Euro
 
10

 

 

 
 
$
22

 
$

 
$
(1
)
As of September 1, 2011:
 
 

 
 

 
 

Yen
 
$
19

 
$
1

 
$

Euro
 
232

 
8

 

 
 
$
251

 
$
9

 
$

(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 2012 , we recognized $2 million and $11 million , respectively, of net derivative losses in other comprehensive income from the effective portion of cash flow hedges. 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 significant in the second quarters and first six months of 2012 and 2011.  Amounts in accumulated other comprehensive income are amortized to manufacturing cost over the useful life of the underlying hedged equipment and reclassified to earnings when inventory is sold.  In the second quarter and first six months of 2012 , $2 million and $4 million , respectively, of net gains was 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 in the next 12 months was $6 million as of March 1, 2012 .


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 1, 2012
 
September 1, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Money market (1)
 
$
1,520

 
$

 
$

 
$
1,520

 
$
1,462

 
$

 
$

 
$
1,462

Certificates of deposit (1)
 

 
2

 

 
2

 

 
155

 

 
155

Marketable equity investments (2)
 
4

 
10

 

 
14

 
37

 
15

 

 
52

Assets held for sale (2)
 

 

 
30

 
30

 

 

 
35

 
35

 
 
$
1,524

 
$
12

 
$
30

 
$
1,566

 
$
1,499

 
$
170

 
$
35

 
$
1,704

(1)  
Included in cash   and equivalents.
(2)  
Included in other noncurrent assets.

Certificates of deposit : Certificates of deposit assets were valued using observable inputs in active markets for similar assets (Level 2).


15



Marketable equity investments : All marketable equity investments were classified as available-for-sale. For the second quarter of 2012, we realized gains of $34 million from the sale of marketable equity investments. Gross realized gains and gross realized losses on sales of our marketable equity investments were not significant for the second quarter or first six months of 2011. Marketable equity investments included approximately 20 million ordinary shares of Tower Semiconductor Ltd. received in connection with our sale of our wafer fabrication facility in Japan in June 2011. As of September 1, 2011 , the shares were valued using quoted market prices in an active market and discounted using a protective put model for our resale restriction (Level 2). During the second quarter of 2012, the resale restrictions lapsed for 5 million of the shares, which were valued using quoted market prices (Level 1) as of March 1, 2012 .

Assets held for sale : Assets held for sale primarily included semiconductor equipment and facilities.  Fair value for semiconductor equipment was based on quotations obtained from equipment dealers, which consider the remaining useful life and configuration of the equipment. Fair value for facilities was determined based on sales of similar facilities and properties in comparable markets (Level 3).  Losses recognized in the second quarters and first six months of 2012 and 2011 due to fair value measurements using Level 3 inputs, were not significant. For the second quarter and first six months of 2012, activity of assets held for sale was not significant.

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (carrying value excludes the equity component of the 2014 Notes, the 2027 Notes and the 2031 Notes which is classified in equity) were as follows:

 
 
March 1, 2012
 
September 1, 2011
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Convertible debt instruments (Level 1)
 
$
951

 
$
837

 
$
1,216

 
$
1,049

Convertible debt instruments (Level 2)
 
1,184

 
776

 
629

 
529

Other debt instruments
 
713

 
702

 
436

 
423


The fair value of our Level 1 convertible debt instruments was based on quoted market prices in active markets.  The fair value of our Level 2 convertible debt instruments was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours.  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 similar debt issued by parties with credit ratings similar to ours (Level 2).


Equity Plans

As of March 1, 2012 , we had an aggregate of 186.5 million shares of common stock reserved for the issuance of stock options and restricted stock awards, of which 108.4 million shares were subject to outstanding awards and 78.1 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 14.5 million and 20.4 million stock options during the second quarter and first six months of 2012, respectively, with weighted-average grant-date fair values per share of $3.25 and $3.16 , respectively. 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.


16



The fair values of option awards were estimated as of the dates 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.  Since 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 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Average expected life in years
 
5.1

 
5.0

 
5.1

 
5.1

Weighted-average expected volatility
 
66
%
 
55
%
 
66
%
 
56
%
Weighted-average risk-free interest rate
 
0.9
%
 
2.1
%
 
1.0
%
 
1.8
%

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

As of March 1, 2012 , there were 10.4 million shares of Restricted Stock Awards outstanding, of which 2.4 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 quarters and first six months of 2012 and 2011 were as follows:

 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Service-based awards
 
2.0

 
3.1

 
3.8

 
4.3

Performance-based awards
 

 

 
1.9

 
1.2

Weighted-average grant-date fair values per share
 
$
5.84

 
$
9.62

 
$
5.40

 
$
8.74


Stock-based Compensation Expense

Total compensation costs for our equity plans were as follows:

 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Stock-based compensation expense by caption:
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
7

 
$
6

 
$
12

 
$
10

Selling, general and administrative
 
18

 
9

 
29

 
20

Research and development
 
5

 
4

 
9

 
8

 
 
$
30

 
$
19

 
$
50

 
$
38

 
 
 
 
 
 
 
 
 
Stock-based compensation expense by type of award:
 
 

 
 

 
 
 
 
Stock options
 
$
19

 
$
11

 
$
31

 
$
21

Restricted stock awards
 
11

 
8

 
19

 
17

 
 
$
30

 
$
19

 
$
50

 
$
38


Selling, general and administrative expense for the second quarter of 2012 included $9 million from the acceleration and extension of vesting of our former Chief Executive Officer's restricted stock and stock options upon his death, pursuant to the terms of our stock plans and his severance agreement.


17



As of March 1, 2012 , $ 173 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 2016 , resulting in a weighted-average period of 1.4 years.  Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with our treatment of income or loss from our U.S. operations.  (See "Income Taxes" note.)


Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
(Gain) loss on disposition of property, plant and equipment
 
$
5

 
$
(16
)
 
$
6

 
$
(16
)
(Gain) loss from changes in currency exchange rates
 
2

 

 
13

 
7

Samsung patent cross-license agreement
 

 
(40
)
 

 
(240
)
Other
 
12

 
(20
)
 
6

 
(18
)
 
 
$
19

 
$
(76
)
 
$
25

 
$
(267
)

In the first quarter of 2011, we entered into a 10-year patent cross-license agreement with Samsung Electronics Co. Ltd. ("Samsung") under which we received a total of $275 million of cash.  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 the third 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.


Other Non-Operating Income (Expense), Net

Other non-operating income for the second quarter of 2012 included $39 million in net gains recognized from the disposition of noncurrent equity investments. Other non-operating expense for the first six months of 2011 included a $111 million loss recognized in the first quarter of 2011 in connection with a series of debt restructure transactions with certain holders of our convertible notes. (See "Debt" note.)


Income Taxes

Income taxes for the first six months of 2012 included a tax benefit of $14 million recognized in the first quarter of 2012 related to the favorable resolution of certain prior year tax matters, which was previously reserved as an uncertain tax position.  Income taxes for the second quarter of 2011 included a charge to reduce net deferred tax assets by $19 million in connection with a change in certain tax rates. Income taxes for the second and first quarters of 2011 included charges of $7 million and $33 million , respectively, in connection with the receipt of $40 million and $200 million , respectively, from Samsung for a cross-license agreement. Remaining taxes in the second and first quarters of 2012 and 2011 primarily reflect taxes on our non-U.S. operations.  We have a valuation allowance for our net deferred tax asset associated with our U.S. operations.  The provision (benefit) for taxes on U.S. operations in the second and first quarters of 2012 and 2011 was 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 equity awards, convertible notes and escrow 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 290.9 million for the second quarter and first six months of 2012, and 166.0 million and 167.5 million for the second quarter and first six months of 2011, respectively.

18




 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Net income (loss) available to Micron shareholders – Basic
 
$
(282
)
 
$
72

 
$
(469
)
 
$
227

Net effect of assumed conversion of debt
 

 
2

 

 
4

Net income (loss) available to Micron shareholders – Diluted
 
$
(282
)
 
$
74

 
$
(469
)
 
$
231

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
 
982.8

 
988.1

 
982.1

 
980.5

Net effect of dilutive equity awards, escrow shares and assumed conversion of debt
 

 
49.2

 

 
54.0

Weighted-average common shares outstanding – Diluted
 
982.8

 
1,037.3

 
982.1

 
1,034.5

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.29
)
 
$
0.07

 
$
(0.48
)
 
$
0.23

Diluted
 
(0.29
)
 
0.07

 
(0.48
)
 
0.22



Comprehensive Income (Loss)

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

 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Net income (loss)
 
$
(282
)
 
$
75

 
$
(469
)
 
$
247

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on investments
 
(32
)
 
4

 
(30
)
 
7

Net gain (loss) on derivatives
 
(4
)
 
22

 
(15
)
 
28

Net gain (loss) on foreign currency translation adjustment
 
2

 
41

 
(19
)
 
59

Pension liability adjustment
 

 

 

 
1

Total other comprehensive income (loss)
 
(34
)
 
67

 
(64
)
 
95

Comprehensive income (loss)
 
(316
)
 
142

 
(533
)
 
342

Comprehensive loss (income) attributable to noncontrolling interests
 
1

 
(4
)
 

 
(25
)
Comprehensive income (loss) attributable to Micron
 
$
(315
)
 
$
138

 
$
(533
)
 
$
317


The components of accumulated other comprehensive income (loss), net of tax, at the end of each period were as follows:

As of
 
March 1, 2012
 
September 1, 2011
Accumulated translation adjustment, net
 
$
46

 
$
65

Gain (loss) on derivatives, net
 
28

 
43

Gain (loss) on investments, net
 
(5
)
 
25

Unrecognized pension liability
 
(1
)
 
(1
)
Accumulated other comprehensive income
 
$
68

 
$
132





19



Consolidated Variable Interest Entities

IM Flash

Through the second quarter of 2012, we had 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. On February 27, 2012, we entered into agreements with Intel relating to our IMFS and IMFT joint ventures. The transactions contemplated by such agreements became effective on April 6, 2012 .  For further information regarding the effect of these agreements, see "IM Flash Agreements" note.

Through the second quarter of 2012, IMFT and IMFS were each governed by a Board of Managers, the number of which adjusted depending on the parties' respective ownership interests. We and Intel initially appointed an equal number of managers to each of the boards. IMFT and IMFS are aggregated as IM Flash in the following disclosure due to the similarity of their 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 1, 2012 , we owned 51% and Intel owned 49% of IMFT and we owned 82% and Intel owned 18% of IMFS. On April 6, 2012, we acquired Intel's 18% ownership interest in IMFS. The IMFT joint venture arrangement extends through 2024 (as a result of the April 6, 2012 agreements) but is subject to prior termination under certain terms and conditions.

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

 
 
Quarter Ended
 
Six Months Ended
 
 
March 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
IM Flash distributions to Micron
 
$
67

 
$
53

 
$
153

 
$
104

IM Flash distributions to Intel
 
64

 
50

 
147

 
99

Micron contributions to IM Flash
 

 
343

 
103

 
735

Intel contributions to IM Flash
 

 

 
131

 


IM Flash sold 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 $ 255 million and $ 516 million for the second quarter and first six months of 2012, respectively, and were $ 202 million and $ 411 million for the second quarter and first six months 2011, respectively. As of March 1, 2012 and September 1, 2011 , IM Flash had receivables of $ 145 million and $ 165 million , respectively, from Intel.

Through the second quarter of 2012, our share of the operating costs and supply of NAND Flash from IMFS was adjusted for changes in our ownership share in IMFS. Accordingly, our share of IMFS output grew from 51% in the first quarter of 2011 to 78% in the second quarter of 2012. As a result of the April 6, 2012 agreements with Intel, we acquired Intel's 18% interest in IMFS and the assets of IMFT located at our Virginia wafer fabrication facility. Accordingly, Intel has no continuing rights to the output from the IMFS and Virginia facilities and, subsequent to April 6, 2012 , purchases NAND Flash products from us under a cost-plus supply arrangement. In addition, Intel continues to receive output from the remaining IMFT fabrication facility in proportion to its ownership interest at long-term negotiated prices approximating cost.


20



Total IM Flash assets and liabilities included in our consolidated balance sheets were as follows:

As of
 
March 1,
2012
 
September 1, 2011
Assets
 
 
 
 
Cash and equivalents
 
$
171

 
$
327

Receivables
 
217

 
252

Inventories
 
240

 
227

Other current assets
 
14

 
11

Total current assets
 
642

 
817

Property, plant and equipment, net
 
3,991

 
4,121

Other noncurrent assets
 
66

 
66

Total assets
 
$
4,699

 
$
5,004

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
194

 
$
458

Deferred income
 
122

 
125

Equipment purchase contracts
 
93

 
37

Current portion of long-term debt
 
10

 
8

Total current liabilities
 
419

 
628

Long-term debt
 
78

 
58

Other noncurrent liabilities
 
4

 
4

Total liabilities
 
$
501

 
$
690

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

The table above included, as of March 1, 2012, assets of $ 2,880 million and liabilities of $ 193 million , and as of September 1, 2011, assets of $ 2,999 million and liabilities of $ 433 million , related to our IM Flash entities that, subsequent to the April 6, 2012 agreements with Intel, were wholly-owned by us. See "IM Flash Agreements" note.

Our ability to access IMFT's cash and marketable investment securities subsequent to April 6, 2012 to finance our other operations is subject to agreement by our joint venture partner.  Prior to April 6, 2012, the creditors of each IM Flash entity had recourse only to the assets of the respective IM Flash entities and did not have recourse to any other of our assets. Subsequent to April 6, 2012, the creditors of IMFT have recourse only to its assets and do not have recourse to any other of our assets.

IM Flash manufactures NAND Flash memory products using designs and technology we develop with Intel. We generally share product design and other NAND Flash R&D costs equally with Intel. As a result, R&D expenses were reduced by reimbursements from Intel of $ 20 million and $ 42 million for the second quarter and first six months of 2012, respectively, and $ 23 million and $ 46 million for the second quarter and first six months of 2011, respectively. The April 6, 2012 agreements with Intel expanded our NAND Flash R&D cost-sharing agreement with Intel to include certain emerging memory technologies, but did not change the cost-sharing percentage.

MP Mask

In 2006, we formed a joint venture with Photronics to produce photomasks for leading-edge and advanced next generation semiconductors.  At inception and through March 1, 2012 , we owned 50.01% and Photronics owned 49.99% of MP Mask.  In the first quarter of 2012, we contributed $ 8 million and Photronics contributed $ 7 million to MP Mask. 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.  Deferred income and other noncurrent liabilities included an aggregate of $30 million and $34 million as of March 1, 2012 and September 1, 2011, respectively, related to this agreement. We purchase a substantial majority of the reticles produced by MP Mask pursuant to a supply arrangement.


21



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

As of
 
March 1,
2012
 
September 1, 2011
Current assets
 
$
20

 
$
24

Noncurrent assets (primarily property, plant and equipment)
 
184

 
143

Current liabilities
 
51

 
31

Amounts exclude intercompany balances that were 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.

Through February 24, 2012, we leased to Photronics a facility to produce photomasks under an operating lease. On February 24, 2012, we sold the facility to Photronics for $ 35 million . The proceeds were equal to our net carrying value and no gain or loss was realized from the sale.


IM Flash Agreements

On February 27, 2012, we entered into agreements with Intel relating to our IMFS and IMFT joint ventures. The transactions contemplated by such agreements became effective on April 6, 2012 . In connection therewith, we acquired Intel's 18% interest in IMFS and the assets of IMFT located at our Virginia wafer fabrication facility. As a result, Intel received distributions of approximately $ 600 million , the approximate book value of its interests. Additionally, Intel deposited $ 300 million with us to be applied to Intel's future purchases of NAND Flash under a NAND Flash supply agreement or, under certain circumstances, to be refunded.

The agreements also provided for the following:

expansion of the scope of the IMFT joint venture to include certain emerging memory technologies;
new agreements under which we will supply NAND Flash memory products and certain emerging memory products to Intel on a cost-plus basis, and a termination of IMFS's supply agreement with us and Intel;
extension of IMFT's joint venture agreement through 2024; and
certain buy-sell rights, commencing in 2015, pursuant to which Intel may elect to sell to us, or we may elect to purchase from Intel, Intel’s interest in IMFT (if Intel so elects, we would set the closing date of the transaction within two years following such election and could elect to receive financing from Intel for one to two years).

In connection with purchasing the IMFT assets located in Virginia, we terminated IMFT's lease to use approximately 50% of our Virginia fabrication facility. As a result, we expect to recognize a charge of $ 17 million in the third quarter of 2012.

We also entered into a senior unsecured promissory note with Intel. Under the terms of the note, we borrowed $65 million , payable with interest in eight approximately equal quarterly installments with interest at a rate of Libor minus 50 basis points (but will not be less than zero ).

We and Intel will continue to share output of IMFT and certain research and development costs generally in proportion to our investments in IMFT.


Segment Information

Segment information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision makers.  Factors used to identify our segments include, among others, products, technologies and customers.  We have the following four reportable segments:

NAND Solutions Group ("NSG"):   Includes high-volume NAND Flash products sold into data storage, personal music players, and the high-density computing markets, as well as NAND Flash products sold to Intel through our consolidated IM Flash joint ventures.

22



DRAM Solutions Group ("DSG"): Includes DRAM products sold to the PC, consumer electronics, networking and server markets.
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, LED, microdisplay and solar operations.

We do not identify or report internally our assets or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other non-operating income or expense items or taxes to 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 1,
2012
 
March 3,
2011
 
March 1,
2012
 
March 3,
2011
Net sales:
 
 
 
 
 
 
 
 
NSG
 
$
734

 
$
552

 
$
1,417

 
$
1,054

DSG
 
608

 
841

 
1,264

 
1,744

WSG
 
307

 
510

 
680

 
1,021

ESG
 
242

 
252

 
504

 
518

All Other
 
118

 
102

 
234

 
172

 
 
$
2,009

 
$
2,257

 
$
4,099

 
$
4,509

 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 

 
 

 
 
 
 
NSG
 
$
97

 
$
72

 
$
191

 
$
129

DSG
 
(167
)