Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 06/22/2018 11:41:57)



 
 
 
 
 
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 May 31, 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 June 15, 2018 was 1,159,810,627 .
 
 
 
 
 





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; capital spending in 2018; and the timing of completing construction of additional clean-room space and initial wafer output from our Singapore NAND fabrication facility. 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
 
MSTW
 
Micron Semiconductor Taiwan Co., Ltd.
2026 Notes
 
5.63% Senior Notes due 2026
 
MTTW
 
Micron Technology Taiwan, Inc.
2032C Notes
 
2.38% Convertible Senior Notes due 2032
 
Qimonda
 
Qimonda AG
2032D Notes
 
3.13% Convertible Senior Notes due 2032
 
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
 
TLC
 
Triple-Level Cell
IMFT
 
IM Flash Technologies, LLC
 
VIE
 
Variable Interest Entity
Inotera
 
Inotera Memories, Inc.
 
 
 
 


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
 
Nine months ended
 
May 31,
2018
 
June 1,
2017
 
May 31,
2018
 
June 1,
2017
Net sales
$
7,797

 
$
5,566

 
$
21,951

 
$
14,184

Cost of goods sold
3,074

 
2,957

 
9,211

 
8,860

Gross margin
4,723

 
2,609

 
12,740

 
5,324

 
 
 
 
 
 
 
 
Selling, general, and administrative
211

 
204

 
598

 
550

Research and development
603

 
434

 
1,574

 
1,377

Other operating (income) expense, net
(44
)
 
8

 
(49
)
 
31

Operating income
3,953

 
1,963

 
10,617

 
3,366

 
 
 
 
 
 
 
 
Interest income
36

 
10

 
86

 
25

Interest expense
(80
)
 
(153
)
 
(292
)
 
(453
)
Other non-operating income (expense), net
(193
)
 
(83
)
 
(450
)
 
(63
)
 
3,716

 
1,737

 
9,961

 
2,875

 
 
 
 
 
 
 
 
Income tax (provision) benefit
109

 
(92
)
 
(148
)
 
(161
)
Equity in net income (loss) of equity method investees
(2
)
 
2

 
(1
)
 
7

Net income
3,823

 
1,647

 
9,812

 
2,721

 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests

 

 
(2
)
 

Net income attributable to Micron
$
3,823

 
$
1,647

 
$
9,810

 
$
2,721

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
3.30

 
$
1.49

 
$
8.53

 
$
2.52

Diluted
3.10

 
1.40

 
7.96

 
2.38

 
 
 
 
 
 
 
 
Number of shares used in per share calculations
 
 
 
 
 
 
 
Basic
1,159

 
1,106

 
1,150

 
1,082

Diluted
1,235

 
1,177

 
1,233

 
1,142











See accompanying notes to consolidated financial statements.

2




MICRON TECHNOLOGY, INC.

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

 
Quarter ended
 
Nine months ended
 
May 31,
2018
 
June 1,
2017
 
May 31,
2018
 
June 1,
2017
Net income
$
3,823

 
$
1,647

 
$
9,812

 
$
2,721

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Gains (losses) on derivative instruments
(21
)
 
6

 
(6
)
 
(1
)
Pension liability adjustments
(1
)
 
1

 

 

Unrealized gains (losses) on investments

 
1

 
(2
)
 

Foreign currency translation adjustments
1

 
11

 
1

 
48

Other comprehensive income (loss)
(21
)
 
19

 
(7
)
 
47

Total comprehensive income
3,802

 
1,666

 
9,805

 
2,768

Comprehensive (income) attributable to noncontrolling interests

 

 
(2
)
 

Comprehensive income attributable to Micron
$
3,802

 
$
1,666

 
$
9,803

 
$
2,768



































See accompanying notes to consolidated financial statements.

3




MICRON TECHNOLOGY, INC.

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

As of
 
May 31,
2018
 
August 31,
2017
Assets
 
 
 
 
Cash and equivalents
 
$
6,808

 
$
5,109

Short-term investments
 
263

 
319

Receivables
 
4,912

 
3,759

Inventories
 
3,369

 
3,123

Other current assets
 
147

 
147

Total current assets
 
15,499

 
12,457

Long-term marketable investments
 
487

 
617

Property, plant, and equipment, net
 
22,705

 
19,431

Intangible assets, net
 
334

 
387

Deferred tax assets
 
989

 
766

Goodwill
 
1,228

 
1,228

Other noncurrent assets
 
603

 
450

Total assets
 
$
41,845

 
$
35,336

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
3,998

 
$
3,664

Deferred income
 
431

 
408

Current debt
 
1,454

 
1,262

Total current liabilities
 
5,883

 
5,334

Long-term debt
 
5,890

 
9,872

Other noncurrent liabilities
 
549

 
639

Total liabilities
 
12,322

 
15,845

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
5

 
21

 
 
 
 
 
Micron shareholders' equity
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,169 shares issued and 1,160 outstanding (1,116 shares issued and 1,112 outstanding as of August 31, 2017)
 
117

 
112

Additional capital
 
8,869

 
8,287

Retained earnings
 
20,070

 
10,260

Treasury stock, 9 shares (4 shares as of August 31, 2017)
 
(429
)
 
(67
)
Accumulated other comprehensive income
 
22

 
29

Total Micron shareholders' equity
 
28,649

 
18,621

Noncontrolling interests in subsidiaries
 
869

 
849

Total equity
 
29,518

 
19,470

Total liabilities and equity
 
$
41,845

 
$
35,336




See accompanying notes to consolidated financial statements.

4




MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)

Nine months ended
 
May 31,
2018
 
June 1,
2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
9,812

 
$
2,721

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

 
 

Depreciation expense and amortization of intangible assets
 
3,474

 
2,795

Amortization of debt discount and other costs
 
78

 
93

Loss on debt prepayments, repurchases, and conversions
 
386

 
62

Stock-based compensation
 
151

 
158

Gain on remeasurement of previously-held equity interest in Inotera
 

 
(71
)
Change in operating assets and liabilities
 
 

 
 

Receivables
 
(1,177
)
 
(1,338
)
Inventories
 
(246
)
 
108

Accounts payable and accrued expenses
 
38

 
511

Payments attributed to intercompany balances with Inotera
 

 
(361
)
Deferred income taxes, net
 
(216
)
 
80

Other
 
(55
)
 
192

Net cash provided by operating activities
 
12,245

 
4,950

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant, and equipment
 
(6,628
)
 
(3,469
)
Purchases of available-for-sale securities
 
(606
)
 
(943
)
Payments to settle hedging activities
 
(84
)
 
(267
)
Acquisition of Inotera
 

 
(2,634
)
Proceeds from sales of available-for-sale securities
 
569

 
742

Proceeds from maturities of available-for-sale securities
 
219

 
115

Proceeds from settlement of hedging activities
 
151

 
146

Other
 
292

 
51

Net cash provided by (used for) investing activities
 
(6,087
)
 
(6,259
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Repayments of debt
 
(6,767
)
 
(1,774
)
Payments on equipment purchase contracts
 
(170
)
 
(261
)
Proceeds from issuance of stock
 
1,636

 
108

Proceeds from issuance of debt
 
969

 
3,136

Other
 
(111
)
 
(2
)
Net cash provided by (used for) financing activities
 
(4,443
)
 
1,207

 
 
 
 
 
Effect of changes in currency exchange rates on cash, cash equivalents, and restricted cash
 
(4
)
 
(15
)
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
1,711

 
(117
)
Cash, cash equivalents, and restricted cash at beginning of period
 
5,216

 
4,263

Cash, cash equivalents, and restricted cash at end of period
 
$
6,927

 
$
4,146



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.


Significant Accounting Policies

Our significant accounting policies include those described in our Annual Report on Form 10-K for the year ended August 31, 2017 as well as the policy below.

Government Incentives: We receive incentives from governmental entities related to expenses, assets, and other activities. Our government incentives may require that we meet or maintain specified spending levels and other operational metrics and may be subject to reimbursement if such conditions are not met or maintained. Government incentives are recorded in the financial statements in accordance with their purpose: as a reduction of expenses, a reduction of asset costs, or other income. Incentives related to specific operating activities are offset against the related expense in the period the expense is incurred. Incentives related to the acquisition or construction of fixed assets are recognized as a reduction in the carrying amounts of the related assets and reduce depreciation expense over the useful lives of the assets. Other incentives are recognized as other operating income. Government incentives received prior to being earned are recognized in current or noncurrent deferred income, whereas government incentives earned prior to being received are recognized in current or noncurrent receivables. Cash received from government incentives related to operating expenses are included as an operating activity in the statement of cash flows, whereas incentives related to the acquisition of property, plant, and equipment are included as an investing activity.


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

6




consolidate PTI Xi'an. In connection with our assembly services with PTI, we had capital lease obligations and net property, plant, and equipment of $72 million and $69 million , respectively, as of May 31, 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.)


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, with prospective adoption for amendments related to equity securities without readily determinable fair values. 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

7




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 19% of our consolidated revenue for the third quarter and first nine months of 2018 , and 19% and 21% of our consolidated revenue for the third quarter and first nine 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.


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
 
Nine months ended
 
June 1,
2017
 
June 1,
2017
Net sales
$
5,566

 
$
14,179

Net income
1,696

 
2,776

Net income attributable to Micron
1,696

 
2,776

Earnings per share
 
 
 
Basic
1.53

 
2.52

Diluted
1.44

 
2.39

 
The pro forma financial information includes our results for the quarter and nine months ended June 1, 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
 
May 31, 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
 
$
3,452

 
$

 
$

 
$
3,452

 
$
2,237

 
$

 
$

 
$
2,237

Level 1 (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
3,061

 

 

 
3,061

 
2,332

 

 

 
2,332

Level 2 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
2

 
151

 
269

 
422

 

 
193

 
315

 
508

Certificates of deposit
 
259

 
10

 
2

 
271

 
483

 
24

 
3

 
510

Government securities
 

 
62

 
99

 
161

 
1

 
90

 
126

 
217

Asset-backed securities
 

 
14

 
117

 
131

 

 
2

 
173

 
175

Commercial paper
 
34

 
26

 

 
60

 
56

 
10

 

 
66

 
 
6,808

 
$
263

 
$
487

 
$
7,558

 
5,109

 
$
319

 
$
617

 
$
6,045

Restricted cash (4)
 
119

 
 
 
 
 
 
 
107

 
 
 
 
 
 
Cash, cash equivalents, and restricted cash
 
$
6,927

 
 
 
 
 
 
 
$
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 May 31, 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 May 31, 2018 , there were no available-for-sale securities that had been in a loss position for longer than 12 months.


Receivables

As of
 
May 31,
2018
 
August 31,
2017
Trade receivables
 
$
4,513

 
$
3,490

Income and other taxes
 
142

 
100

Other
 
257

 
169

 
 
$
4,912

 
$
3,759




9




Inventories

As of
 
May 31,
2018
 
August 31,
2017
Finished goods
 
$
828

 
$
856

Work in process
 
2,168

 
1,968

Raw materials and supplies
 
373

 
299

 
 
$
3,369

 
$
3,123



Property, Plant, and Equipment

As of
 
May 31,
2018
 
August 31,
2017
Land
 
$
345

 
$
345

Buildings
 
8,560

 
7,958

Equipment (1)
 
36,909

 
32,187

Construction in progress (2)
 
826

 
499

Software
 
624

 
544

 
 
47,264

 
41,533

Accumulated depreciation
 
(24,559
)
 
(22,102
)
 
 
$
22,705

 
$
19,431

(1)  
Included costs related to equipment not placed into service of $1.41 billion and $994 million , as of May 31, 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
 
May 31, 2018
 
August 31, 2017
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortizing assets
 
 
 
 
 
 
 
 
Product and process technology
 
$
573

 
$
(347
)
 
$
756

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

 

 
108

 

 
 
 
 
 
 
 
 
 
Total intangible assets
 
$
681

 
$
(347
)
 
$
864

 
$
(477
)
 
 
 
 
 
 
 
 
 
Goodwill
 
$
1,228

 
 
 
$
1,228

 
 

During the first nine months of 2018 and 2017 , we capitalized $27 million and $22 million , respectively, for product and process technology with weighted-average useful lives of 11 years and 10 years, respectively. Expected amortization expense is $20 million for the remainder of 2018 , $52 million for 2019 , $37 million for 2020 , $30 million for 2021 , and $20 million for 2022 .



10




Accounts Payable and Accrued Expenses

As of
 
May 31,
2018
 
August 31,
2017
Accounts payable
 
$
1,360

 
$
1,333

Property, plant, and equipment payables
 
1,143

 
1,018

Salaries, wages, and benefits
 
692

 
603

Income and other taxes
 
311

 
163

Customer advances
 
181

 
197

Other
 
311

 
350

 
 
$
3,998

 
$
3,664



Debt

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

 
6.52
%
 
$
237

 
$
259

 
$
496

 
$
157

 
$
474

 
$
631

Capital lease obligations
 
N/A

 
3.80
%
 
346

 
605

 
951

 
357

 
833

 
1,190

2021 MSAC Term Loan
 
4.42
%
 
4.65
%
 

 

 

 
99

 
697

 
796

2021 MSTW Term Loan
 
2.85
%
 
3.01
%
 

 
1,993

 
1,993

 

 
2,640

 
2,640

2022 Term Loan B
 
3.74
%
 
4.15
%
 
5

 
721

 
726

 
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

2025 Notes
 
5.50
%
 
5.56
%
 

 
515

 
515

 

 
515

 
515

2026 Notes
 
5.63
%
 
5.73
%
 

 

 

 

 
128

 
128

2032C Notes (1)(2)
 
2.38
%
 
5.95
%
 
504

 

 
504

 

 
211

 
211

2032D Notes (1)
 
3.13
%
 
6.33
%
 
77

 
149

 
226

 

 
159

 
159

2033E Notes (1)
 
1.63
%
 
1.63
%
 
43

 

 
43

 
202

 

 
202

2033F Notes (1)
 
2.13
%
 
4.93
%
 
123

 

 
123

 
278

 

 
278

2043G Notes (1)
 
3.00
%
 
6.76
%
 
10

 
679

 
689

 

 
671

 
671

IMFT Member Debt
 
0.00
%
 
0.00
%
 

 
969

 
969

 

 

 

Other notes
 
1.84
%
 
2.46
%
 
109

 

 
109

 
164

 
44

 
208

 
 
 
 
 
 
$
1,454

 
$
5,890

 
$
7,344

 
$
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 March 31, 2018, these notes are convertible by the holders at any time through the calendar quarter ended June 30, 2018. Current debt as of May 31, 2018 included an aggregate of $553 million for the settlement obligation (including principal and amounts in excess of principal) for conversions of certain convertible notes that will settle in cash in the fourth quarter of 2018. Additionally, the closing price of our common stock also exceeded the thresholds for the calendar quarter ended June 30, 2018; therefore, these notes are convertible by the holders at any time through September 30, 2018.
(2)  
The 2032C Notes were classified as current as of May 31, 2018 because the holders can require us to repurchase for cash all or a portion of the 2032C Notes on May 1, 2019.

The carrying values in the table above as of May 31, 2018 include $4 million of principal amount of our 2033E Notes for which we announced we would redeem on June 15, 2018 and $553 million for the aggregate settlement obligation of certain convertible notes that had been converted but not settled. Additionally, in June 2018, we made an irrevocable election under the terms of the 2021 MSTW Term Loan to prepay principal of 25 billion New Taiwan dollars (equivalent to $836 million as of May 31, 2018) on July 6, 2018. These items had an aggregate carrying value of $1.39 billion as of May 31, 2018 that will settle in the fourth quarter of 2018 and reduce the carrying value of our debt.


11




Debt Prepayments, Repurchases, and Conversions

During the first nine months of 2018 , we prepaid, repurchased, and settled conversions of debt with an aggregate of $4.73 billion principal amount. 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 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 prepayments, repurchases, and conversions of debt in the first nine months of 2018:
Nine months ended May 31, 2018
 
Decrease in Principal
 
Increase (Decrease) in Carrying Value
 
Decrease in Cash
 
Decrease in Equity
 
Gain (Loss)
Prepayments and repurchases
 
 
 
 
 
 
 
 
 
 
2021 MSAC Term Loan
 
$
(730
)
 
$
(727
)
 
$
(730
)
 
$

 
$
(3
)
2021 MSTW Term Loan
 
(671
)
 
(668
)
 
(671
)
 

 
(3
)
2023 Notes
 
(1,000
)
 
(991
)
 
(1,046
)
 

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

 
(135
)
2024 Notes
 
(550
)
 
(546
)
 
(572
)
 

 
(25
)
2026 Notes
 
(129
)
 
(129
)
 
(139
)
 

 
(11
)
2033F Notes
 
(66
)
 
(63
)
 
(316
)
 
(252
)
 
(1
)
Settled conversions
 
 
 
 
 
 
 
 
 
 
2032C Notes
 
(52
)
 
(49
)
 
(240
)
 
(195
)
 
4

2033E Notes (1)
 
(161
)
 
(191
)
 
(491
)
 
(251
)
 
(49
)
2033F Notes
 
(119
)
 
(114
)
 
(575
)
 
(447
)
 
(14
)
Conversions not settled (2)
 
 
 
 
 
 
 
 
 
 
2032C Notes
 

 
338

 

 
(264
)
 
(74
)
2032D Notes
 

 
64

 

 
(51
)
 
(13
)
2033E Notes
 

 
31

 

 
(29
)
 
(3
)
2033F Notes
 

 
17

 

 
(14
)
 
(3
)
2043G Notes
 

 
6

 

 
(5
)
 
(1
)
 
 
$
(4,728
)
 
$
(4,260
)
 
$
(6,153
)
 
$
(1,508
)
 
$
(386
)
(1)  
Settlement included issuance of 4 million shares of our treasury stock in addition to payment of cash.
(2)  
As of May 31, 2018, an aggregate of $101 million in principal amount of our convertible notes (with a carrying value of $553 million ) had converted but not settled. These notes will settle in cash in the fourth quarter of 2018.


IMFT Member Debt

In the first nine months of 2018, Intel provided debt financing ("IMFT Member Debt") of $969 million to IMFT pursuant to the terms of the IMFT joint venture agreement. IMFT Member Debt bears no interest, matures upon the completion of an auction and 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.)


12




2022 Senior Secured Term Loan B Repricing Amendment

On October 26, 2017 and April 27, 2018, 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 May 31, 2018 , the 2022 Term Loan B bears interest at LIBOR plus 1.75% .
 
Convertible Senior Notes

As of May 31, 2018 , the trading price of our common stock was higher than the initial conversion prices of our convertible notes. As a result, the conversion values for these notes exceeded the principal amounts by $3.21 billion as of May 31, 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.

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, Micron Semiconductor Products, Inc., 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. On April 3, 2018, Micron Semiconductor (Shanghai) Co. Ltd. ("MSS") was served with the same complaint. The complaint alleges that MXA and MSS 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 in China, to stop manufacturing, using, selling, and offering for sale the accused products in China, 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. On April 3, 2018, MSS was served with the same complaint. The complaint alleges that MXA and MSS 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 in China, to stop manufacturing, using, selling, and offering for sale the accused products in China, and to pay damages of 90 million Chinese yuan plus court fees incurred.

On April 3, 2018, MSS was served with another patent infringement complaint filed by Jinhua and two additional complaints filed by UMC in the Fuzhou Intermediate People's Court in Fujian Province, China. The three additional complaints allege that MSS infringes three Chinese patents by manufacturing and selling certain Crucial MX300 SSDs and certain GDDR5

13




memory chips. The two complaints filed by UMC each seek an order requiring the defendant to destroy inventory of the accused products and equipment for manufacturing the accused products in China, to stop manufacturing, using, selling, and offering for sale the accused products in China, and to pay damages of 90 million Chinese yuan plus court fees incurred. The complaint filed by Jinhua seeks an order requiring the defendants to destroy inventory of the accused products and equipment for manufacturing the accused products in China, to stop manufacturing, using, selling, and offering for sale the accused products in China, and to pay damages of 98 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 May 31, 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 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.

On April 27, 2018, a purported class-action lawsuit was filed against Micron and other DRAM suppliers in the U.S. District Court for the Northern District of California asserting claims based on alleged price-fixing of DRAM products during

14




the period from June 1, 2016 to February 1, 2018. Similar cases were subsequently filed in Canadian courts in Quebec, Montreal and Toronto, Ontario. The complaints seek treble monetary damages, costs, interest, attorneys' fees, and other injunctive and equitable relief. We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss. The final resolution of these matters could result in significant liability and could have a material adverse effect on our business, results of operations, or financial condition.

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


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 May 31, 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 $98 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 nine months of 2018, we share-settled portions of our capped calls upon expiration, and received 9 million shares (equal to a value of $429 million ) based on the volume-weighted trading stock prices at the expiration dates. Shares received were recorded as treasury stock.

Common Stock Repurchase Authorization : In May 2018, we announced that our Board of Directors had authorized the discretionary repurchase of up to $10 billion of our outstanding common stock beginning in 2019. We may purchase shares on a discretionary basis through open-market purchases, block trades, privately-negotiated transactions, and/or derivative transactions, subject to market conditions and our ongoing determination of the best use of available cash. The repurchase authorization does not obligate us to acquire any common stock.

Noncontrolling Interests in Subsidiaries

As of
 
May 31, 2018
 
August 31, 2017
 
 
Balance
 
Percentage
 
Balance
 
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

15




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 $114 million and $341 million for the third quarter and first nine months of 2018 , respectively, and $123 million and $375 million for the third quarter and first nine 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 between 50% and 100% , at Intel's choice, of Intel's immediately preceding six -month period pre-closing volumes of IMFT products for the first six -month period following the closing and between 0% and 100% , at Intel's choice, 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.

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
 
May 31,
2018
 
August 31,
2017
Assets
 
 
 
 
Cash and equivalents
 
$
109

 
$
87

Receivables
 
86

 
81

Inventories
 
119

 
128

Other current assets
 
6

 
7

Total current assets
 
320

 
303

Property, plant, and equipment, net
 
2,706

 
1,852

Other noncurrent assets
 
46

 
49

Total assets
 
$
3,072

 
$
2,204

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
200

 
$
299

Deferred income
 
9

 
6

Current debt
 
20

 
19

Total current liabilities
 
229

 
324

Long-term debt
 
1,029

 
75

Other noncurrent liabilities
 
77

 
88

Total liabilities
 
$
1,335

 
$
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 May 31, 2018 were $3.98 billion for the MMJ Group, $4.06 billion for MSTW and MTTW, and $885 million for IMFT.



16




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
 
May 31, 2018
 
August 31, 2017
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ Creditor Payments
 
$
4,870

 
$
4,808

 
$
8,793

 
$
8,423

Convertible notes
 
4,734

 
1,585

 
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.



17




Derivative Instruments

 
 
Gross Notional Amount (1)
 
Fair Value of
Current Assets (2)
 
Current Liabilities (3)
 
Noncurrent Assets (4)
As of May 31, 2018
 
 
 
 
 
 
 
 
Derivative instruments with hedge accounting designation
 
 
 
 
 
 
 
 
Cash flow currency hedges
 
$
822

 
$
2

 
$
(15
)
 
$

Fair value currency hedges
 
239

 

 
(10
)
 

 
 


 
2

 
(25
)
 

 
 
 
 
 
 
 
 
 
Derivative instruments without hedge accounting designation
 
 
 
 
 
 
 
 
Non-designated currency hedges
 
4,989

 
8

 
(25
)
 

Convertible notes settlement obligation (5)
 
 
 

 
(558
)
 

 
 
 
 
8

 
(583
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
$
10

 
$
(608
)
 
$

 
 
 
 
 
 
 
 
 
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 (5)
 
 
 

 
(47
)
 

 
 
 
 
34

 
(52
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
$
51

 
$
(52
)
 
$
1

(1)  
Notional amounts of currency hedge contracts in U.S. dollars.
(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.
(5)  
Notional amounts of convertible notes settlement obligations as of May 31, 2018 and August 31, 2017 were 10 million and 2 million shares of our common stock, respectively.

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 for our exposure 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 gains or losses on 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 losses in accumulated other comprehensive income from the effective portion of cash flow hedges of $23 million and $6 million for the third quarter and first nine months of 2018 , respectively, and gains of $6 million and losses of $3 million for the third quarter and first nine months of 2017 , respectively. Neither the amount excluded from hedge effectiveness

18




nor the reclassifications from accumulated other comprehensive income to earnings were material in the third quarters or first nine months of 2018 and 2017 . The amounts 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 for our exposure 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 in the fair value of the undiscounted spot rate of the forward contract. The changes in fair values of hedge instruments attributed to changes in undiscounted spot rates are recognized in other non-operating income (expense). The time value associated with hedge instruments is excluded from the assessment of the effectiveness of hedges and is recognized on a straight-line basis over the life of hedges to other non-operating income (expense). Amounts recorded to other comprehensive income (loss) for the third quarter and first nine months of 2018 were not material. The effects of fair value hedges on our consolidated statements of operations were as follows:
 
Quarter ended
 
Nine months ended
 
May 31, 2018
 
May 31, 2018
 
Other Non-Operating Income (Expense)
Gain (loss) on remeasurement of hedged assets and liabilities
$
28

 
$
(28
)
Gain (loss) on derivatives designated as hedging instruments
(28
)
 
28

Amortization of amounts excluded from hedge effectiveness
(13
)
 
(32
)
 
$
(13
)
 
$
(32
)

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives : Except for certain assets 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 from 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 from changes in currency exchange rates are included in other non-operating income (expense). For derivative instruments without hedge accounting designation, we recognized losses of $52 million for the third quarter, which offset $52 million of gains recognized during the first six months of 2018 , and we recognized gains of $70 million and losses of $47 million for the third quarter and first nine months of 2017 , respectively.

Convertible Note Settlement Obligations : For settlement obligations associated with our convertible notes 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 were based on the volume-weighted-average price of our common stock (Level 2). (See "Debt" note.) We recognized losses of $119 million and $143 million for the third quarter and first nine months of 2018, respectively, in other non-operating income (expense), net for the changes in fair value of the derivative settlement obligations.


Equity Plans

As of May 31, 2018 , 127 million shares of our common stock were available for future awards under our equity plans, including 33 million shares approved for issuance under our employee stock purchase plan ("ESPP").

Employee Stock Purchase Plan

Our ESPP was approved by shareholders at our 2017 Annual Shareholder Meeting and will be offered to substantially all employees beginning in August 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions of up to 10% of their eligible compensation, subject to certain limitations. The purchase price of the shares under the ESPP equals 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six -month offering period.


19




Stock Options

 
Quarter ended
 
Nine months ended
 
May 31, 2018
 
June 1, 2017
 
May 31, 2018
 
June 1, 2017
Stock options granted

 
1

 
2

 
7

Weighted-average grant-date fair value per share
$
24.14

 
$
11.64

 
$
18.61

 
$
8.59

Average expected life in years
5.4

 
5.5

 
5.5

 
5.5

Weighted-average expected volatility
45
%
 
44
%
 
44
%
 
46
%
Weighted-average risk-free interest rate
2.8
%
 
2.0
%
 
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
 
Nine months ended
 
May 31,
2018
 
June 1,
2017
 
May 31,
2018
 
June 1,
2017
Restricted stock award shares granted

 

 
4

 
8

Weighted-average grant-date fair value per share
$
53.77

 
$
27.75

 
$
42.14

 
$
19.10


Stock-based Compensation Expense

 
Quarter ended
 
Nine months ended
 
May 31,
2018
 
June 1,
2017
 
May 31,
2018
 
June 1,
2017
Stock-based compensation expense by caption
 
 
 
 
 
 
 
Cost of goods sold
$
20

 
$
24

 
$
62

 
$
66

Selling, general, and administrative
14

 
20

 
48

 
53

Research and development
14

 
13

 
41

 
39

 
$
48

 
$
57

 
$
151

 
$
158

 
 
 
 
 
 
 
 
Stock-based compensation expense by type of award
 

 
 

 
 
 
 
Stock options
$
13

 
$
19

 
$
44

 
$
54

Restricted stock awards
35

 
38

 
107

 
104

 
$
48

 
$
57

 
$
151

 
$
158


The income tax benefit related to share-based compensation was $26 million and $142 million for the third quarter and first nine months of 2018, respectively, and $17 million and $80 million for the third quarter and first nine months of 2017, respectively. The income tax benefits related to share-based compensation for the periods presented prior to the second quarter of 2018 were offset by an increase in the U.S. valuation allowance. As of May 31, 2018 , $364 million of total unrecognized compensation costs for unvested awards was expected to be recognized through the third quarter of 2022 , resulting in a weighted-average period of 1.3 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 $53 million and $167 million for the third quarter and first nine months of 2018 , respectively, and $47 million and $162 million for the third quarter and first nine months of 2017 , respectively.



20




Other Non-Operating Income (Expense), Net

 
Quarter ended
 
Nine months ended
 
May 31,
2018
 
June 1,
2017
 
May 31,
2018
 
June 1,
2017
Loss on debt prepayments, repurchases, and conversions
$
(168
)
 
$
(61
)
 
$
(386
)
 
$
(63
)
Loss from changes in currency exchange rates
(24
)
 
(22
)
 
(60
)
 
(62
)
Gain on remeasurement of previously-held equity interest in Inotera

 

 

 
71

Other