Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 03/23/2018 14:55:12)



 
 
 
 
 
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, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
 
Commission file number 1-10658
Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
75-1618004
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
8000 S. Federal Way, Boise, Idaho
83716-9632
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
(208) 368-4000

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 March 16, 2018 was 1,159,764,549 .
 
 
 
 
 





Micron Technology, Inc., including its consolidated subsidiaries, is an industry leader in innovative memory and storage solutions. Through our global brands – Micron ® , Crucial ® , and Ballistix ® – our broad portfolio of high-performance memory and storage technologies, including DRAM, NAND, NOR Flash, and 3D XPoint TM memory, is transforming how the world uses information to enrich life. Backed by nearly 40 years of technology leadership, our memory and storage solutions enable disruptive trends, including artificial intelligence, machine learning, and autonomous vehicles, in key market segments like cloud, data center, networking, and mobile.

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

Forward-Looking Statements

This Form 10-Q contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made regarding timing of product introductions; our expected NAND development activities with Intel; the effect of U.S. tax reform; our expectation to engage, from time to time, in additional financing transactions; the sufficiency of our cash and investments, cash flows from operations, and available financing to meet our requirements for at least the next 12 months; and capital spending in 2018. We are under no obligation to update these forward-looking statements. Our actual results could differ materially from our historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Part II, Other Information – Item 1A. Risk Factors."

Definitions of Commonly Used Terms

As used herein, "we," "our," "us," and similar terms include Micron Technology, Inc. and our consolidated subsidiaries, unless the context indicates otherwise. Abbreviations, terms, or acronyms are commonly used or found in multiple locations throughout this report and include the following:
Term
 
Definition
 
Term
 
Definition
2021 MSAC Term Loan
 
Variable Rate MSAC Senior Secured Term Loan due 2021
 
Intel
 
Intel Corporation
2021 MSTW Term Loan
 
Variable Rate MSTW Senior Secured Term Loan due 2021
 
Japan Court
 
Tokyo District Court
2022 Term Loan B
 
Senior Secured Term Loan B due 2022
 
Micron
 
Micron Technology, Inc. (Parent Company)
2023 Notes
 
5.25% Senior Notes due 2023
 
MMJ
 
Micron Memory Japan, Inc.
2023 Secured Notes
 
7.50% Senior Secured Notes due 2023
 
MMJ Group
 
MMJ and its subsidiaries
2024 Notes
 
5.25% Senior Notes due 2024
 
MMT
 
Micron Memory Taiwan Co., Ltd.
2025 Notes
 
5.50% Senior Notes due 2025
 
MSP
 
Micron Semiconductor Products, Inc.
2026 Notes
 
5.63% Senior Notes due 2026
 
MSTW
 
Micron Semiconductor Taiwan Co., Ltd.
2032C Notes
 
2.38% Convertible Senior Notes due 2032
 
MTTW
 
Micron Technology Taiwan, Inc.
2032D Notes
 
3.13% Convertible Senior Notes due 2032
 
Qimonda
 
Qimonda AG
2033 Notes
 
2033E and 2033F Notes
 
R&D
 
Research and Development
2033E Notes
 
1.63% Convertible Senior Notes due 2033
 
SG&A
 
Selling, General, and Administrative
2033F Notes
 
2.13% Convertible Senior Notes due 2033
 
SSD
 
Solid-State Drive
2043G Notes
 
3.00% Convertible Senior Notes due 2043
 
Tera Probe
 
Tera Probe, Inc.
IMFT
 
IM Flash Technologies, LLC
 
TLC
 
Triple-Level Cell
Inotera
 
Inotera Memories, Inc.
 
VIE
 
Variable Interest Entity


1




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,
2018
 
March 2,
2017
 
March 1,
2018
 
March 2,
2017
Net sales
$
7,351

 
$
4,648

 
$
14,154

 
$
8,618

Cost of goods sold
3,081

 
2,944

 
6,137

 
5,903

Gross margin
4,270

 
1,704

 
8,017

 
2,715

 
 
 
 
 
 
 
 
Selling, general, and administrative
196

 
187

 
387

 
346

Research and development
523

 
473

 
971

 
943

Other operating (income) expense, net
(16
)
 

 
(5
)
 
23

Operating income
3,567

 
1,044

 
6,664

 
1,403

 
 
 
 
 
 
 
 
Interest income
27

 
8

 
50

 
15

Interest expense
(88
)
 
(161
)
 
(212
)
 
(300
)
Other non-operating income (expense), net
(53
)
 
34

 
(257
)
 
20

 
3,453

 
925

 
6,245

 
1,138

 
 
 
 
 
 
 
 
Income tax (provision) benefit
(143
)
 
(38
)
 
(257
)
 
(69
)
Equity in net income (loss) of equity method investees
1

 
7

 
1

 
5

Net income
3,311

 
894

 
5,989

 
1,074

 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests
(2
)
 

 
(2
)
 

Net income attributable to Micron
$
3,309

 
$
894

 
$
5,987

 
$
1,074

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
2.86

 
$
0.81

 
$
5.23

 
$
1.00

Diluted
2.67

 
0.77

 
4.86

 
0.95

 
 
 
 
 
 
 
 
Number of shares used in per share calculations
 
 
 
 
 
 
 
Basic
1,156

 
1,099

 
1,145

 
1,070

Diluted
1,238

 
1,160

 
1,232

 
1,125











See accompanying notes to consolidated financial statements.

2




MICRON TECHNOLOGY, INC.

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

 
Quarter ended
 
Six months ended
 
March 1,
2018
 
March 2,
2017
 
March 1,
2018
 
March 2,
2017
Net income
$
3,311

 
$
894

 
$
5,989

 
$
1,074

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Gain (loss) on derivatives, net
18

 

 
15

 
(7
)
Pension liability adjustments
2

 

 
1

 
(1
)
Gain (loss) on investments, net
(1
)
 

 
(2
)
 
(1
)
Foreign currency translation adjustments

 

 

 
37

Other comprehensive income (loss)
19

 

 
14

 
28

Total comprehensive income
3,330

 
894

 
6,003

 
1,102

Comprehensive (income) attributable to noncontrolling interests
(2
)
 

 
(2
)
 

Comprehensive income attributable to Micron
$
3,328

 
$
894

 
$
6,001

 
$
1,102



































See accompanying notes to consolidated financial statements.

3




MICRON TECHNOLOGY, INC.

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

As of
 
March 1,
2018
 
August 31,
2017
Assets
 
 
 
 
Cash and equivalents
 
$
7,828

 
$
5,109

Short-term investments
 
214

 
319

Receivables
 
4,437

 
3,759

Inventories
 
3,184

 
3,123

Other current assets
 
173

 
147

Total current assets
 
15,836

 
12,457

Long-term marketable investments
 
520

 
617

Property, plant, and equipment, net
 
21,864

 
19,431

Intangible assets, net
 
348

 
387

Deferred tax assets
 
1,026

 
766

Goodwill
 
1,228

 
1,228

Other noncurrent assets
 
441

 
450

Total assets
 
$
41,263

 
$
35,336

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
4,194

 
$
3,664

Deferred income
 
427

 
408

Current debt
 
1,514

 
1,262

Total current liabilities
 
6,135

 
5,334

Long-term debt
 
7,802

 
9,872

Other noncurrent liabilities
 
746

 
639

Total liabilities
 
14,683

 
15,845

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
14

 
21

 
 
 
 
 
Micron shareholders' equity
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,165 shares issued and 1,158 outstanding (1,116 shares issued and 1,112 outstanding as of August 31, 2017)
 
116

 
112

Additional capital
 
9,604

 
8,287

Retained earnings
 
16,247

 
10,260

Treasury stock, 7 shares (4 shares as of August 31, 2017)
 
(313
)
 
(67
)
Accumulated other comprehensive income
 
43

 
29

Total Micron shareholders' equity
 
25,697

 
18,621

Noncontrolling interests in subsidiaries
 
869

 
849

Total equity
 
26,566

 
19,470

Total liabilities and equity
 
$
41,263

 
$
35,336




See accompanying notes to consolidated financial statements.

4




MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six months ended
 
March 1,
2018
 
March 2,
2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
5,989

 
$
1,074

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

 
 

Depreciation expense and amortization of intangible assets
 
2,241

 
1,774

Amortization of debt discount and other costs
 
55

 
63

Loss on debt repurchases and conversions
 
218

 
1

Stock-based compensation
 
103

 
101

Gain on remeasurement of previously-held equity interest in Inotera
 

 
(71
)
Change in operating assets and liabilities
 
 

 
 

Receivables
 
(630
)
 
(773
)
Inventories
 
(62
)
 
174

Accounts payable and accrued expenses
 
93

 
399

Payments attributed to intercompany balances with Inotera
 

 
(361
)
Deferred income taxes, net
 
(262
)
 
59

Other noncurrent liabilities
 
229

 
(23
)
Other
 
10

 
126

Net cash provided by operating activities
 
7,984

 
2,543

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant, and equipment
 
(4,217
)
 
(2,428
)
Purchases of available-for-sale securities
 
(502
)
 
(803
)
Payments to settle hedging activities
 
(28
)
 
(249
)
Acquisition of Inotera
 

 
(2,634
)
Proceeds from sales of available-for-sale securities
 
562

 
548

Proceeds from maturities of available-for-sale securities
 
138

 
72

Proceeds from settlement of hedging activities
 
111

 
74

Other
 
93

 
35

Net cash provided by (used for) investing activities
 
(3,843
)
 
(5,385
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Repayments of debt
 
(3,379
)
 
(556
)
Payments on equipment purchase contracts
 
(153
)
 
(33
)
Proceeds from issuance of stock
 
1,554

 
68

Proceeds from issuance of debt
 
650

 
2,961

Other
 
(92
)
 
(99
)
Net cash provided by (used for) financing activities
 
(1,420
)
 
2,341

 
 
 
 
 
Effect of changes in currency exchange rates on cash, cash equivalents, and restricted cash
 
4

 
(33
)
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
2,725

 
(534
)
Cash, cash equivalents, and restricted cash at beginning of period
 
5,216

 
4,263

Cash, cash equivalents, and restricted cash at end of period
 
$
7,941

 
$
3,729


See accompanying notes to consolidated financial statements.

5




MICRON TECHNOLOGY, INC.

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

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Micron and our consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 31, 2017. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal years 2018 and 2017 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 31, 2017.


Variable Interest Entities

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

Unconsolidated VIE

PTI Xi'an : Powertech Technology Inc. Xi'an ("PTI Xi'an") is a wholly-owned subsidiary of Powertech Technology Inc. ("PTI") and was created to provide assembly services to us at our manufacturing site in Xi'an, China. We do not have an equity interest in PTI Xi'an. PTI Xi'an is a VIE because of the terms of its service agreement with us and its dependency on PTI to finance its operations. We have determined that we do not have the power to direct the activities of PTI Xi'an that most significantly impact its economic performance, primarily because we have no governance rights. Therefore, we do not consolidate PTI Xi'an. In connection therewith, we had capital lease obligations and net property, plant, and equipment of $78 million and $74 million , respectively, as of March 1, 2018 , and $80 million and $76 million , respectively, as of August 31, 2017 .

Consolidated VIE

IMFT : IMFT is a VIE because all of its costs are passed to us and its other member, Intel, through product purchase agreements and because IMFT is dependent upon us or Intel for additional cash requirements. The primary activities of IMFT are driven by the constant introduction of product and process technology. Because we perform a significant majority of the technology development, we have the power to direct its key activities. We consolidate IMFT because we have the power to direct the activities of IMFT that most significantly impact its economic performance and because we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it. (See "Equity – Noncontrolling Interests in Subsidiaries – IMFT" note.)



6




Recently Issued Accounting Standards

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

In June 2016, the FASB issued ASU 2016-13 – Measurement of Credit Losses on Financial Instruments , which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. This ASU will be effective for us in the first quarter of 2021 with adoption permitted as early as the first quarter of 2020. This ASU requires modified retrospective adoption, with prospective adoption for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In February 2016, the FASB issued ASU 2016-02 – Leases , which amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of- use asset and corresponding liability, measured at the present value of the lease payments. This ASU will be effective for us in the first quarter of 2020 with early adoption permitted and requires modified retrospective adoption. The adoption of this ASU will result in an increase in right-of-use assets and corresponding liabilities. We are evaluating the timing and other effects of our adoption of this ASU on our financial statements.

In January 2016, the FASB issued ASU 2016-01 – Recognition and Measurement of Financial Assets and Financial Liabilities , which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us in the first quarter of 2019 and requires modified retrospective adoption. Our assets and liabilities subject to this standard are not material.

In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers , which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. The core principal of this ASU, as amended, is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in the first quarter of 2019 and we expect to elect the modified retrospective adoption method.

As a result of the adoption of this ASU, we expect to recognize revenue from sales of products to our distributors (which generally have agreements allowing rights of return or price protection) at the time control transfers to our distributors, which is generally earlier than recognizing revenue only upon resale by our distributors under existing revenue recognition guidance. Revenue recognized upon resale by our distributors under these arrangements was 17% and 19% of our consolidated revenue for the second quarter and first six months of 2018 , respectively, and 20% and 22% of our consolidated revenue for the second quarter and first six months of 2017 , respectively. On the date of initial application of this ASU, we will derecognize the deferred income on sales made to our distributors through a cumulative adjustment to retained earnings. We expect the revenue deferral, historically recognized in the following period, to be offset by the earlier recognition of revenue as described above as control of product transfers to our distributors. As a result of the adoption of this ASU, we expect to recognize interest expense from the financing component for contracts with advanced payments under which we transfer control of our products to our customers for periods extending beyond one year, although historically such arrangements would not have resulted in significant amounts of interest expense. As a result of the adoption of this ASU, we expect that revenue recognized under our current license agreements will not change materially.



7




Acquisition of Inotera

Through December 6, 2016, we held a 33% ownership interest in Inotera, now known as Micron Technology Taiwan, Inc. ("MTTW") and accounted for our ownership interest under the equity method. On December 6, 2016, we acquired the remaining 67% ownership interest in Inotera not owned by us (the "Inotera Acquisition") and began consolidating Inotera's operating results. Inotera manufactures DRAM products at its 300mm wafer fabrication facility in Taoyuan City, Taiwan, and previously sold such products exclusively to us through supply agreements, under which we purchased $504 million of DRAM products in the first quarter of 2017, based on a pricing formula that equally shared margin between Inotera and us.

Pro Forma Financial Information

The following pro forma financial information presents the combined results of operations as if the Inotera Acquisition had occurred on September 4, 2015. The pro forma financial information includes the accounting effects of the business combination, including adjustments for depreciation of property, plant, and equipment, interest expense, elimination of intercompany activities, and revaluation of inventories. The pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Inotera Acquisition occurred on September 4, 2015.
 
Quarter ended
 
Six months ended
 
March 2,
2017
 
March 2,
2017
Net sales
$
4,648

 
$
8,613

Net income
890

 
1,080

Net income attributable to Micron
890

 
1,080

Earnings per share
 
 
 
Basic
0.81

 
0.98

Diluted
0.77

 
0.93

 
The pro forma financial information includes our results for the quarter and six months ended March 2, 2017 (which includes the results of Inotera since our acquisition of Inotera on December 6, 2016), the results of Inotera for the three months ended November 30, 2016, and the adjustments described above.



8




Cash and Investments

Cash and equivalents and the fair values of our available-for-sale investments, which approximated amortized costs, were as follows:
As of
 
March 1, 2018
 
August 31, 2017
 
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (1)
 
Total Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (1)
 
Total Fair Value
Cash
 
$
2,496

 
$

 
$

 
$
2,496

 
$
2,237

 
$

 
$

 
$
2,237

Level 1 (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
5,099

 

 

 
5,099

 
2,332

 

 

 
2,332

Level 2 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
122

 
299

 
421

 

 
193

 
315

 
508

Government securities
 
39

 
55

 
95

 
189

 
1

 
90

 
126

 
217

Certificates of deposit
 
172

 
7

 
1

 
180

 
483

 
24

 
3

 
510

Asset-backed securities
 

 
14

 
125

 
139

 

 
2

 
173

 
175

Commercial paper
 
22

 
16

 

 
38

 
56

 
10

 

 
66

 
 
7,828

 
$
214

 
$
520

 
$
8,562

 
5,109

 
$
319

 
$
617

 
$
6,045

Restricted cash (4)
 
113

 
 
 
 
 
 
 
107

 
 
 
 
 
 
Cash, cash equivalents, and restricted cash
 
$
7,941

 
 
 
 
 
 
 
$
5,216

 
 
 
 
 
 
(1)  
The maturities of long-term marketable securities range from one to four years.
(2)  
The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(3)  
The fair value of Level 2 securities is measured using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analyses to validate information obtained from these pricing services. No adjustments were made to the fair values indicated by such pricing information as of March 1, 2018 or August 31, 2017.
(4)  
Restricted cash is included in other noncurrent assets and primarily represents balances related to the MMJ Creditor Payments and interest reserve balances related to the 2021 MSTW Term Loan.

Gross realized gains and losses from sales of available-for-sale securities were not material for any period presented. As of March 1, 2018 , there were no available-for-sale securities that had been in a loss position for longer than 12 months.


Receivables

As of
 
March 1,
2018
 
August 31,
2017
Trade receivables
 
$
4,050

 
$
3,490

Income and other taxes
 
134

 
100

Other
 
253

 
169

 
 
$
4,437

 
$
3,759




9




Inventories

As of
 
March 1,
2018
 
August 31,
2017
Finished goods
 
$
876

 
$
856

Work in process
 
1,974

 
1,968

Raw materials and supplies
 
334

 
299

 
 
$
3,184

 
$
3,123



Property, Plant, and Equipment

As of
 
March 1,
2018
 
August 31,
2017
Land
 
$
345

 
$
345

Buildings
 
8,367

 
7,958

Equipment (1)
 
35,600

 
32,187

Construction in progress (2)
 
599

 
499

Software
 
611

 
544

 
 
45,522

 
41,533

Accumulated depreciation
 
(23,658
)
 
(22,102
)
 
 
$
21,864

 
$
19,431

(1)  
Included costs related to equipment not placed into service of $1.92 billion and $994 million , as of March 1, 2018 and August 31, 2017 , respectively.
(2)  
Includes building-related construction and tool installation costs for assets not placed into service.


Intangible Assets and Goodwill

As of
 
March 1, 2018
 
August 31, 2017
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortizing assets
 
 
 
 
 
 
 
 
Product and process technology
 
$
731

 
$
(491
)
 
$
756

 
$
(477
)
Non-amortizing assets
 
 
 
 
 
 
 
 
In-process R&D
 
108

 

 
108

 

 
 
 
 
 
 
 
 
 
Total intangible assets
 
$
839

 
$
(491
)
 
$
864

 
$
(477
)
 
 
 
 
 
 
 
 
 
Goodwill
 
$
1,228

 
 
 
$
1,228

 
 

During the first six months of 2018 and 2017 , we capitalized $15 million and $14 million , respectively, for product and process technology with weighted-average useful lives of 12 years and 10 years, respectively. Expected amortization expense is $45 million for the remainder of 2018 , $50 million for 2019 , $35 million for 2020 , $29 million for 2021 , and $20 million for 2022 .



10




Accounts Payable and Accrued Expenses

As of
 
March 1,
2018
 
August 31,
2017
Accounts payable
 
$
1,557

 
$
1,333

Property, plant, and equipment payables
 
1,351

 
1,018

Salaries, wages, and benefits
 
517

 
603

Income and other taxes
 
288

 
163

Customer advances
 
176

 
197

Other
 
305

 
350

 
 
$
4,194

 
$
3,664



Debt

As of
 
March 1, 2018
 
August 31, 2017
Instrument
 
Stated Rate
 
Effective Rate
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
MMJ Creditor Payments
 
N/A

 
6.52
%
 
$
238

 
$
261

 
$
499

 
$
157

 
$
474

 
$
631

Capital lease obligations
 
N/A

 
3.75
%
 
371

 
679

 
1,050

 
357

 
833

 
1,190

2021 MSAC Term Loan
 
3.89
%
 
4.13
%
 
199

 
578

 
777

 
99

 
697

 
796

2021 MSTW Term Loan
 
2.85
%
 
3.01
%
 

 
2,716

 
2,716

 

 
2,640

 
2,640

2022 Term Loan B
 
3.65
%
 
4.06
%
 
5

 
723

 
728

 
5

 
725

 
730

2023 Notes
 
5.25
%
 
5.43
%
 

 

 

 

 
991

 
991

2023 Secured Notes
 
7.50
%
 
7.69
%
 

 

 

 

 
1,238

 
1,238

2024 Notes
 
5.25
%
 
5.38
%
 

 
546

 
546

 

 
546

 
546

2025 Notes
 
5.50
%
 
5.56
%
 

 
515

 
515

 

 
515

 
515

2026 Notes
 
5.63
%
 
5.73
%
 

 
129

 
129

 

 
128

 
128

2032C Notes (1)
 
2.38
%
 
5.95
%
 

 
165

 
165

 

 
211

 
211

2032D Notes (1)
 
3.13
%
 
6.33
%
 

 
161

 
161

 

 
159

 
159

2033E Notes (1)(2)
 
1.63
%
 
1.63
%
 
197

 

 
197

 
202

 

 
202

2033F Notes (1)(2)
 
2.13
%
 
4.93
%
 
378

 

 
378

 
278

 

 
278

2043G Notes (1)
 
3.00
%
 
6.76
%
 

 
679

 
679

 

 
671

 
671

IMFT Member Debt
 
0.00
%
 
0.00
%
 

 
650

 
650

 

 

 

Other notes
 
2.09
%
 
2.65
%
 
126

 

 
126

 
164

 
44

 
208

 
 
 
 
 
 
$
1,514

 
$
7,802

 
$
9,316

 
$
1,262

 
$
9,872

 
$
11,134

(1)  
Since the closing price of our common stock exceeded 130% of the conversion price per share for at least 20 trading days in the 30 trading day period ended on December 31, 2017, these notes are convertible by the holders through the calendar quarter ended March 31, 2018. The 2033 Notes were classified as current because the terms of these notes require us to pay cash for the principal amount of any converted notes and holders of these notes had the right to convert their notes as of the dates presented.
(2)  
Amounts as of March 1, 2018 include $178 million and $129 million for the settlement obligation (principal and amounts in excess of principal) of 2033E Notes and 2033F Notes, respectively, that had been converted but not settled. Amounts as of August 31, 2017 include $88 million for the settlement obligation (principal and amounts in excess of principal) of 2033E Notes that had been converted but not settled.

Debt Repurchases and Conversions

During the first six months of 2018 , we repurchased or settled as a result of conversion an aggregate of $2.42 billion principal amount of our debt. When we receive a notice of conversion for any of our convertible notes and elect to settle in cash any amount of the conversion obligation in excess of the principal amount, the cash settlement obligations become derivative debt liabilities subject to mark-to-market accounting treatment based on the volume-weighted-average price of our common

11




stock over a period of 20 consecutive trading days. Accordingly, at the date of our election to settle a conversion in cash, we reclassify the fair value of the equity component of the converted notes from additional capital to derivative debt liability within current debt in our consolidated balance sheet.

The following table presents the effects of repurchases and conversions of our debt in the first six months of 2018:
Six months ended March 1, 2018
 
Decrease in Principal
 
Increase (Decrease) in Carrying Value
 
Decrease in Cash
 
Decrease in Equity
 
Gain (Loss)
Repurchases
 
 
 
 
 
 
 
 
 
 
2023 Notes
 
$
(1,000
)
 
$
(991
)
 
$
(1,046
)
 
$

 
$
(55
)
2023 Secured Notes
 
(1,250
)
 
(1,238
)
 
(1,373
)
 

 
(135
)
Settled Conversions
 
 
 
 
 
 
 
 
 
 
2032C Notes
 
(52
)
 
(49
)
 
(240
)
 
(195
)
 
4

2033E Notes (1)
 
(113
)
 
(143
)
 
(249
)
 
(97
)
 
(9
)
2033F Notes
 
(5
)
 
(5
)
 
(22
)
 
(17
)
 

Conversions not settled
 
 
 
 
 
 
 
 
 
 
2033E Notes (2)
 

 
137

 

 
(124
)
 
(13
)
2033F Notes (2)
 

 
101

 

 
(91
)
 
(10
)
 
 
$
(2,420
)
 
$
(2,188
)
 
$
(2,930
)
 
$
(524
)
 
$
(218
)
(1)  
Settlement included 4 million shares of our treasury stock in addition to cash.
(2)  
As of March 1, 2018, $41 million in principal amount of the 2033E Notes and $30 million in principal amount of the 2033F Notes had converted but not settled. These notes will settle in cash in the third quarter of 2018.

IMFT Member Debt

In November 2017 and December 2017, Intel provided debt financing ("IMFT Member Debt") of $150 million and $500 million , respectively, to IMFT pursuant to the terms of the IMFT joint venture agreement. IMFT Member Debt bears no interest, matures upon the completion of the auction and the sale of assets of IMFT prior to the dissolution, liquidation, or other wind-up of IMFT, and is convertible, at the election of Intel, in whole or in part, into a capital contribution to IMFT. Additionally, to the extent IMFT distributes cash to its members under the terms of the IMFT joint venture agreement, Intel may, at its option, designate any portion of the distribution to be a repayment of the IMFT Member Debt. In the event Intel exercises its right to put its interest in IMFT to us, or if we exercise our right to call from Intel its interest in IMFT, Intel will transfer to Micron any IMFT Member Debt outstanding at the time of the closing of the put or call transaction. (See "Equity – Noncontrolling Interest in Subsidiaries – IMFT" note.)

2022 Senior Secured Term Loan B Repricing Amendment

On October 26, 2017, we amended our 2022 Term Loan B, substantially all of which was treated as a debt modification, to reduce the interest rate margins. As of March 1, 2018 , the 2022 Term Loan B bears interest at LIBOR plus 2.00% .
 
Convertible Senior Notes

As of March 1, 2018 , the trading price of our common stock was higher than the initial conversion prices of our convertibles notes. As a result, the conversion values for these notes exceeded the principal amounts by $3.18 billion as of March 1, 2018 .


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 are expected to have a material adverse effect on our business, results of operations, or financial condition.


12




Patent Matters

As is typical in the semiconductor and other high-tech industries, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe upon their intellectual property rights.

On November 21, 2014, Elm 3DS Innovations, LLC ("Elm") filed a patent infringement action against Micron, MSP, and Micron Consumer Products Group, Inc. in the U.S. District Court for the District of Delaware. On March 27, 2015, Elm filed an amended complaint against the same entities. The amended complaint alleges that unspecified semiconductor products of ours that incorporate multiple stacked die infringe 13 U.S. patents and seeks damages, attorneys' fees, and costs.

On December 15, 2014, Innovative Memory Solutions, Inc. filed a patent infringement action against Micron in the U.S. District Court for the District of Delaware. The complaint alleges that a variety of our NAND products infringe eight U.S. patents and seeks damages, attorneys' fees, and costs.

On June 24, 2016, the President and Fellows of Harvard University filed a patent infringement action against Micron in the U.S. District Court for the District of Massachusetts. The complaint alleged that a variety of our DRAM products infringed two U.S. patents and sought damages, injunctive relief, and other unspecified relief. On March 1, 2018, we executed a settlement agreement resolving this litigation. The settlement amount did not have a material effect on our business, results of operations, or financial condition.

On March 19, 2018, Micron Semiconductor (Xi’an) Co., Ltd. ("MXA") was served with a patent infringement complaint filed by Fujian Jinhua Integrated Circuit Co., Ltd. ("Jinhua") in the Fuzhou Intermediate People’s Court in Fujian Province, China. The complaint alleges that MXA and Micron Semiconductor (Shanghai) Co., Ltd. infringe a Chinese patent by manufacturing and selling certain Crucial DDR4 DRAM modules. The complaint seeks an order requiring the defendants to destroy inventory of the accused products and equipment for manufacturing the accused products, to stop manufacturing, using, selling, and offering for sale the accused products, and to pay damages of 98 million Chinese yuan plus court fees incurred.

On March 21, 2018, MXA was served with a patent infringement complaint filed by United Microelectronics Corporation ("UMC") in the Fuzhou Intermediate People's Court in Fujian Province, China. The complaint alleges that MXA and Micron Semiconductor (Shanghai) Co., Ltd. infringe a Chinese patent by manufacturing and selling certain Crucial DDR4 DRAM modules. The complaint seeks an order requiring the defendants to destroy inventory of the accused products and equipment for manufacturing the accused products, to stop manufacturing, using, selling, and offering for sale the accused products, and to pay damages of 90 million Chinese yuan plus court fees incurred.

Among other things, the above lawsuits pertain to certain of our DDR DRAM, DDR2 DRAM, DDR3 DRAM, DDR4 DRAM, SDR SDRAM, PSRAM, RLDRAM, LPDRAM, NAND, and certain other memory products we manufacture, which account for a significant portion of our net sales.

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

Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda's insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V., our Netherlands subsidiary ("Micron B.V."), in the District Court of Munich, Civil Chamber. The complaint seeks to void, under Section 133 of the German Insolvency Act, a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008, pursuant to which Micron B.V. purchased substantially all of Qimonda's shares of Inotera (the "Inotera Shares"), representing approximately 18% of Inotera's outstanding shares as of March 1, 2018 , and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate, under Sections 103 or 133 of the German Insolvency Code, a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.

Following a series of hearings with pleadings, arguments, and witnesses on behalf of the Qimonda estate, on March 13, 2014, the court issued judgments: (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera Shares

13




sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on the Inotera Shares and all other benefits; (4) denying Qimonda's claims against Micron for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda's obligations under the patent cross-license agreement are canceled. In addition, the court issued interlocutory judgments ordering, among other things: (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by Micron B.V. and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by Micron B.V. from ownership of the Inotera Shares. The interlocutory judgments have no immediate, enforceable effect on us, and, accordingly, we expect to be able to continue to operate with full control of the Inotera Shares subject to further developments in the case. We have filed a notice of appeal, and the parties have submitted briefs to the appeals court.

We are unable to predict the outcome of the matter and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera Shares or monetary damages, unspecified damages based on the benefits derived by Micron B.V. from the ownership of the Inotera Shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operation, or financial condition.

Other

On December 5, 2017, Micron filed a complaint against UMC and Jinhua in the U.S. District Court for the Northern District of California. The complaint alleges that UMC and Jinhua violated the Defend Trade Secrets Act, the civil provisions of the Racketeer Influenced and Corrupt Organizations Act, and California's Uniform Trade Secrets Act by misappropriating Micron's trade secrets and other misconduct. Micron's complaint seeks damages, restitution, disgorgement of profits, injunctive relief, and other appropriate relief.

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.


Equity

Micron Shareholders' Equity

Common Stock Issuance : In October 2017, we issued 34 million shares of our common stock for $41.00 per share in a public offering for proceeds of $1.36 billion , net of underwriting fees and other offering costs.

Outstanding Capped Calls : In connection with certain of our convertible notes, we entered into capped call transactions, which are intended to reduce the effect of potential dilution. The capped calls provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our stock is above the strike prices on the expiration dates. As of March 1, 2018 , the dollar value of cash or shares that we would receive from our outstanding capped calls upon their expiration dates range from $0 , if the trading price of our stock is below the strike prices for all capped calls at expiration, to $214 million , if the trading price of our stock is at or above the cap prices for all capped calls. Settlement of the capped calls prior to the expiration dates may be for an amount less than the maximum value at expiration.

Settlement of Capped Calls : During the first six months of 2018, we share-settled portions of our capped calls upon expiration, and received 7 million shares (equal to a value of $313 million ) based on the volume-weighted trading stock prices at the expiration dates. Shares received were recorded as treasury stock.


14




Noncontrolling Interests in Subsidiaries

As of
 
March 1, 2018
 
August 31, 2017
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT
 
$
852

 
49
%
 
$
832

 
49
%
Other
 
17

 
Various

 
17

 
Various

 
 
$
869

 
 
 
$
849

 
 

IMFT : Since 2006, we have owned 51% of IMFT, a joint venture between us and Intel. IMFT is governed by a Board of Managers, for which the number of managers appointed by each member varies based on the members' respective ownership interests. IMFT manufactures semiconductor products exclusively for its members under a long-term supply agreement at prices approximating cost.

IMFT's capital requirements are generally determined based on an annual plan approved by the members, and capital contributions to IMFT are requested as needed. Capital requests are made to the members in proportion to their then-current ownership interest. Members may elect to not contribute their proportional share, and in such event, the contributing member may elect to contribute any amount of the remaining capital request, either in the form of an equity contribution or member debt financing. Under the supply agreement, the members have rights and obligations to the capacity of IMFT in proportion to their investment, including member debt financing. Any capital contribution or member debt financing results in a proportionate adjustment to the sharing of output on an eight -month lag. Members pay their proportionate share of fixed costs associated with IMFT's capacity.

IMFT sales to Intel were $115 million and $227 million for the second quarter and first six months of 2018 , respectively, and $142 million and $252 million for the second quarter and first six months of 2017 , respectively. In the first quarter of 2018, IMFT discontinued production of NAND and subsequent to that time is entirely focused on 3D XPoint memory production.

The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights. At any time through December 2018, Intel can put to us, and from January 2019 through December 2021, we can call from Intel, Intel's interest in IMFT, in either case, for a price that approximates Intel's interest in the net book value of IMFT plus member debt at the time of the closing. If Intel exercises its put right, we can elect to set the closing date of the transaction any time between six months and two years following such election by Intel and we can elect to receive financing of the purchase price from Intel for one to two years from the closing date. If we exercise our call right, Intel can elect to set the closing date of the transaction to be any time between six months and one year following such election. Following the closing date resulting from exercise of either the put or the call, we will continue to supply to Intel for a period of one year, at Intel's choice, between 50% and 100% of Intel's immediately preceding six -month period pre-closing volumes of IMFT products for the first six -month period following the closing and, at Intel's choice, between 0% and 100% of Intel's first six -month period following the closing volumes of IMFT products for the second six -month period following the closing, at a margin that varies depending on whether the put or call was exercised.


15




Creditors of IMFT have recourse only to IMFT's assets and do not have recourse to any other of our assets. The following table presents the assets and liabilities of IMFT included in our consolidated balance sheets:
As of
 
March 1,
2018
 
August 31,
2017
Assets
 
 
 
 
Cash and equivalents
 
$
317

 
$
87

Receivables
 
87

 
81

Inventories
 
99

 
128

Other current assets
 
5

 
7

Total current assets
 
508

 
303

Property, plant, and equipment, net
 
2,496

 
1,852

Other noncurrent assets
 
43

 
49

Total assets
 
$
3,047

 
$
2,204

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
472

 
$
299

Deferred income
 
10

 
6

Current debt
 
19

 
19

Total current liabilities
 
501

 
324

Long-term debt
 
715

 
75

Other noncurrent liabilities
 
79

 
88

Total liabilities
 
$
1,295

 
$
487

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

Restrictions on Net Assets

As a result of the corporate reorganization proceedings of MMJ, the 2021 MSTW Term Loan covenants, and the IMFT joint venture agreement, our total restricted net assets (excluding intercompany balances and noncontrolling interests) as of March 1, 2018 were $3.86 billion for the MMJ Group, $2.54 billion for MSTW and MTTW, and $900 million for IMFT.


Fair Value Measurements

All of our marketable debt and equity investments were classified as available-for-sale and carried at fair value. Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of our outstanding debt instruments (excluding the carrying value of equity and mezzanine equity components of our convertible notes) were as follows:
As of
 
March 1, 2018
 
August 31, 2017
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ Creditor Payments
$
6,792

 
$
6,686

 
$
8,793

 
$
8,423

Convertible notes
 
4,922

 
1,580

 
3,901

 
1,521


The fair values of our convertible notes were determined based on Level 2 inputs, including the trading price of our convertible notes when available, our stock price, and interest rates based on similar debt issued by parties with credit ratings similar to ours. The fair values of our other debt instruments were estimated based on Level 2 inputs, including discounted cash flows, including the trading price of our notes, when available, and interest rates based on similar debt issued by parties with credit ratings similar to ours.



16




Derivative Instruments

 
 
Gross Notional Amount (1)
 
Fair Value of
Current Assets (2)
 
Current Liabilities (3)
 
Noncurrent Assets (4)
As of March 1, 2018
 
 
 
 
 
 
 
 
Derivative instruments with hedge accounting designation
 
 
 
 
 
 
 
 
Cash flow currency hedges
 
$
565

 
$
20

 
$
(1
)
 
$

Fair value currency hedges
 
2,567

 
44

 
(2
)
 

 
 
$
3,132

 
64

 
(3
)
 

 
 
 
 
 
 
 
 
 
Derivative instruments without hedge accounting designation
 
 
 
 
 
 
 
 
Non-designated currency hedges
 
$
1,763

 
11

 
(3
)
 

Convertible notes settlement obligation
 
6

 

 
(309
)
 

 
 
 
 
11

 
(312
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
$
75

 
$
(315
)
 
$

 
 
 
 
 
 
 
 
 
As of August 31, 2017
 
 
 
 
 
 
 
 
Derivative instruments with hedge accounting designation
 
 
 
 
 
 
 
 
Cash flow currency hedges
 
$
456

 
$
17

 
$

 
$

 
 
 
 
 
 
 
 
 
Derivative instruments without hedge accounting designation
 
 
 
 
 
 
 
 
Non-designated currency hedges
 
$
4,847

 
34

 
(5
)
 
1

Convertible notes settlement obligation
 
2

 

 
(47
)
 

 
 
 
 
34

 
(52
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
$
51

 
$
(52
)
 
$
1

(1)  
Notional amounts of currency forward hedge contracts in U.S. dollars and convertible notes settlement obligations in shares.
(2)  
Included in receivables – other.
(3)  
Included in accounts payable and accrued expenses – other for forward contracts and in current debt for convertible notes settlement obligations.
(4)  
Included in other noncurrent assets.

Derivative Instruments with Hedge Accounting Designation

We utilize currency forward contracts that generally mature within twelve months to hedge our exposure to changes in currency exchange rates. Currency forward contracts are measured at fair value based on market-based observable inputs including currency exchange spot and forward rates, interest rates, and credit-risk spreads (Level 2).

Cash Flow Hedges : We utilize cash flow hedges to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures. For derivative instruments designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives is included as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified into earnings in the same line items and in the same periods in which the underlying transactions affect earnings. For the periods presented prior to the second quarter of 2018, the ineffective and excluded portion of the realized and unrealized gain or loss was included in other non-operating income (expense). As a result of adopting ASU 2017-12, beginning in the second quarter of 2018, such amounts are included in the same line item in which the underlying transactions affect earnings.

We recognized gains in accumulated other comprehensive income from the effective portion of cash flow hedges of $21 million and $17 million for the second quarter and first six months of 2018 , respectively, and losses of $9 million in the first six months of 2017 . Neither the amount excluded from hedge effectiveness nor the reclassifications from accumulated other comprehensive income to earnings were material in the second quarters or first six months of 2018 and 2017 . The amounts

17




from cash flow hedges included in accumulated other comprehensive income that are expected to be reclassified into earnings in the next 12 months were also not material.

Fair Value Hedges : We utilize fair value hedges to hedge our exposure to certain changes in fair values from changes in currency exchange rates for certain monetary assets and liabilities. For derivative forward contracts designated as fair value hedges, hedge effectiveness is determined by the change of the fair value of the undiscounted spot rate of the forward contract. The change in fair value of the hedge instrument attributed to changes in the undiscounted spot rate is recognized in other non-operating income (expense). The time value associated with the hedge instrument is excluded from the assessment of the effectiveness of the hedge and is recognized on a straight-line basis over the life of the hedge to other non-operating income (expense). Amounts recorded to other comprehensive income (loss) for the second quarter of 2018 were not material. The effects of fair value hedges on our consolidated statements of operations were as follows:
Quarter ended March 1, 2018
 
Other
Non-Operating
Income (Expense)
Gain (loss) on remeasurement of hedged assets and liabilities
 
$
(56
)
Gain (loss) on derivatives designated as hedging instruments
 
56

Amortization of amounts excluded from hedge effectiveness
 
(19
)
 
 
$
(19
)

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives : Except for certain asset and liabilities hedged using fair value hedges, we generally utilize a rolling hedge strategy with currency forward contracts that mature within nine months to hedge our exposures of monetary assets and liabilities to changes in currency exchange rates. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into U.S. dollars and the associated outstanding forward contracts are marked to market. Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2). Realized and unrealized gains and losses on derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities due to changes in currency exchange rates are included in other non-operating income (expense). For derivative instruments without hedge accounting designation, we recognized gains of $50 million and $52 million for the second quarter and first six months of 2018 , respectively, and gains of $61 million and losses of $117 million for the second quarter and first six months of 2017 , respectively.

Convertible Notes Settlement Obligations : For settlement obligations associated with our convertible notes that become derivative debt liabilities subject to mark-to-market accounting treatment, the fair values of the underlying derivative settlement obligations were initially determined using the Black-Scholes option valuation model (Level 2), which requires inputs of stock price, expected stock-price volatility, estimated option life, risk-free interest rate, and dividend rate. The subsequent measurement amounts of our convertible note settlement obligations were based on the volume-weighted-average stock price (Level 2). (See "Debt" note.) We recognized losses of $20 million and $24 million for the second quarter and first six months of 2018, respectively, for the changes in fair value of the derivative settlement obligations in other non-operating income (expense), net.


Equity Plans

As of March 1, 2018 , 94 million shares of our common stock were available for future awards under our equity plans.


18




Stock Options

 
Quarter ended
 
Six months ended
 
March 1, 2018
 
March 2, 2017
 
March 1, 2018
 
March 2, 2017
Stock options granted
1

 
4

 
2

 
6

Weighted-average grant-date fair value per share
$
18.61

 
$
8.37

 
$
18.13

 
$
8.15

Average expected life in years
5.5

 
5.5

 
5.5

 
5.5

Weighted-average expected volatility
44
%
 
47
%
 
44
%
 
47
%
Weighted-average risk-free interest rate
2.2
%
 
1.9
%
 
2.2
%
 
1.8
%
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%

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

 
Quarter ended
 
Six months ended
 
March 1,
2018
 
March 2,
2017
 
March 1,
2018
 
March 2,
2017
Restricted stock award shares granted
2

 
5

 
4

 
8

Weighted-average grant-date fair value per share
$
43.21

 
$
18.67

 
$
41.51

 
$
18.52


Stock-based Compensation Expense

 
Quarter ended
 
Six months ended
 
March 1,
2018
 
March 2,
2017
 
March 1,
2018
 
March 2,
2017
Stock-based compensation expense by caption
 
 
 
 
 
 
 
Cost of goods sold
$
22

 
$
23

 
$
42

 
$
42

Selling, general, and administrative
16

 
18

 
34

 
33

Research and development
14

 
14

 
27

 
26

 
$
52

 
$
55

 
$
103

 
$
101

 
 
 
 
 
 
 
 
Stock-based compensation expense by type of award
 

 
 

 
 
 
 
Stock options
$
14

 
$
18

 
$
31

 
$
35

Restricted stock awards
38

 
37

 
72

 
66

 
$
52

 
$
55

 
$
103

 
$
101


The income tax benefit related to share-based compensation expense was $58 million and $116 million for the second quarter and first six months of 2018, respectively, and $42 million and $63 million for the second quarter and first six months of 2017, respectively. The income tax benefits related to share-based compensation expense for the periods presented prior to the second quarter of 2018 were offset by an increase in the U.S. valuation allowance. As of March 1, 2018 , $402 million of total unrecognized compensation costs for unvested awards was expected to be recognized through the second quarter of 2022 , resulting in a weighted-average period of 1.4 years.


Research and Development

We share the cost of certain product and process development activities with development partners. Our R&D expenses were reduced by reimbursements under these arrangements of $58 million and $114 million for the second quarter and first six months of 2018 , respectively, and $59 million and $115 million for the second quarter and first six months of 2017 , respectively.



19




Other Non-Operating Income (Expense), Net

 
Quarter ended
 
Six months ended
 
March 1,
2018
 
March 2,
2017
 
March 1,
2018
 
March 2,
2017
Loss on debt repurchases and conversions
$
(23
)
 
$

 
$
(218
)
 
$
(2
)
Loss from changes in currency exchange rates
(27
)
 
(28
)
 
(36
)
 
(40
)
Gain on remeasurement of previously-held equity interest in Inotera

 
71

 

 
71

Other
(3
)
 
(9
)
 
(3
)
 
(9
)
 
$
(53
)
 
$
34

 
$
(257
)
 
$
20


In connection with the Inotera Acquisition, we revalued our previously-held 33% equity interest to its fair value. In determining the fair value, we used various valuation techniques, including the share price of Inotera prior to the announcement of the acquisition and discounted cash flow projections using inputs including discount rate and terminal growth rate (Level 3). As a result, we recognized a non-operating gain of $71 million in the second quarter of 2017.


Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") that lowers the U.S. corporate income tax rate from 35% to 21% and significantly affects how income from foreign operations is taxed in the United States. As a result of our fiscal year-end, our U.S. statutory federal rate will be 25.7% for 2018 (based on the 35% corporate rate through December 31, 2017 and 21% from that date through the end of fiscal year 2018) and 21% for subsequent years. The Tax Act imposes a one-time transition tax in 2018 on the higher of our accumulated foreign income, as determined as of November 2, 2017 or December 31, 2017 (the "Repatriation Tax"); provides a U.S. federal tax exemption on foreign earnings distributed to the United States; and, beginning in 2019, creates a new minimum tax on certain foreign earnings in excess of a deemed return on tangible assets (the "Foreign Minimum Tax"). The Tax Act allows us to elect to pay any Repatriation Tax due in eight annual interest-free payments in increasing amounts beginning in December 2018. In connection with the provisions of the Tax Act, we are continuing to evaluate whether to account for the Foreign Minimum Tax provisions that begin for us in 2019 as a period cost or in our measurement of deferred taxes.

The Securities and Exchange Commission's Staff Accounting Bulletin No. 118 ("SAB 118") allows the use of provisional amounts (reasonable estimates) if our analyses of the impacts of the Tax Act has not been completed when our financial statements for the second quarter of fiscal year 2018 are issued. Provisional amounts may be adjusted during a one-year measurement period as accounting for the income tax effects of the Tax Act are completed or as estimates are revised.


20




In accordance with SAB 118, we recorded certain provisional estimates included in the table below. Although the provisional estimates are based on the best available interpretations of the Tax Act, the final impacts may differ from the estimates due to, among other things, the issuance of additional regulatory and legislative guidance related to the Tax Act. Our income tax (provision) benefit consisted of the following:
 
Quarter ended
 
Six months ended
 
March 1, 2018
 
March 2, 2017
 
March 1, 2018
 
March 2, 2017
Provisional estimate for the Repatriation Tax on substantially all of our accumulated foreign earnings, net of adjustments related to uncertain tax positions
$
(1,335
)
 
$

 
$
(1,335
)
 
$

Remeasurement of deferred tax assets and liabilities reflecting the lower U.S. corporate tax rates
(133
)
 

 
(133
)
 

Provisional estimate for the release of the valuation allowance on the net deferred tax assets of our U.S. operations
1,337

 

 
1,337

 

Utilization of and other changes in net deferred tax assets of MMJ, MMT, and MTTW
(17
)
 
(8
)
 
(43
)
 
(21
)
Other income tax (provision) benefit
5

 
(30
)
 
(83
)
 
(48
)
 
$
(143
)
 
$
(38
)
 
$
(257
)
 
$
(69
)

As noted above, provisional estimates were recorded for the Repatriation Tax and the release of the valuation allowance on the net deferred tax assets of our U.S. operations. To determine the amount of the Repatriation Tax, we must determine the accumulated foreign earnings of our foreign subsidiaries and the amount of foreign income tax paid on such earnings. The provisional estimate of the Repatriation Tax is also based, in part, on the amount of cash and other specified assets anticipated to be held by our foreign subsidiaries as of August 30, 2018, the end of our fiscal year 2018, which may determine the portion of the accumulated foreign earnings taxed at an effective rate of 15.5% or 8% . As a result, the Repatriation Tax may change as amounts are finalized. The U.S. Department of Treasury has issued interpretive guidance regarding the Repatriation Tax and we expect that they will issue additional guidance. Based on the information available, we can reasonably estimate the Repatriation Tax and therefore recorded a provisional amount; however, we are continuing to gather additional information and analyze authoritative guidance to finalize the computation of the Repatriation Tax as well as the impacts on the valuation allowance release of the Repatriation Tax and the Tax Act.

As of March 1, 2018, we had gross unrecognized income tax benefits of $209 million , of which $196 million would affect our effective tax rate in the future, if recognized. The Tax Act reduced unrecognized tax benefits by $123 million . The amount accrued for interest and penalties related to uncertain tax positions was not material for any period presented.

We operate in a number of tax jurisdictions outside the United States, including Singapore, where we have tax incentive arrangements that are conditional, in part, upon meeting certain business operations and employment thresholds. The effect of tax incentive arrangements, which expire in whole or in part at various dates through 2030, reduced our tax provision by $436 million (benefitting our diluted earnings per share by $0.35 ) and $827 million ( $0.67 per diluted share) for the second quarter and first six months of 2018 , respectively, and $132 million ( $0.11 per diluted share) and $172 million ( $0.15 per diluted share), for the second quarter and first six months of 2017 , respectively.



21




Earnings Per Share