10-Q 1 a2013q1.htm 10-Q 2013 Q1


 
 
 
 
 
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 November 29, 2012

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

Commission file number 1-10658

Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
75-1618004
(State or other jurisdiction of
(IRS Employer 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  x   No  o

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

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

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


The number of outstanding shares of the registrant's common stock as of December 31, 2012, was 1,021,780,637.

 
 
 
 
 




PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

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

Quarter ended
 
November 29,
2012
 
December 1,
2011
Net sales
 
$
1,834

 
$
2,090

Cost of goods sold
 
1,617

 
1,785

Gross margin
 
217

 
305

 
 
 
 
 
Selling, general and administrative
 
119

 
151

Research and development
 
224

 
230

Other operating (income) expense, net
 
31

 
6

Operating loss
 
(157
)
 
(82
)
 
 
 
 
 
Interest income
 
3

 
2

Interest expense
 
(57
)
 
(35
)
Other non-operating income (expense), net
 
1

 

 
 
(210
)
 
(115
)
 
 
 
 
 
Income tax (provision) benefit
 
(13
)
 
2

Equity in net loss of equity method investees
 
(52
)
 
(74
)
Net loss
 
(275
)
 
(187
)
 
 
 
 
 
Net income attributable to noncontrolling interests
 

 

Net loss attributable to Micron
 
$
(275
)
 
$
(187
)
 
 
 
 
 
Loss per share:
 
 
 
 
Basic
 
$
(0.27
)
 
$
(0.19
)
Diluted
 
(0.27
)
 
(0.19
)
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
Basic
 
1,013.7

 
981.4

Diluted
 
1,013.7

 
981.4











See accompanying notes to consolidated financial statements.

1



MICRON TECHNOLOGY, INC.

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

Quarter ended
 
November 29, 2012
 
December 1, 2011
Net loss
 
$
(275
)
 
$
(187
)
Other comprehensive income (loss), net of tax:
 
 
 
 
Cumulative foreign currency translation adjustments
 
7

 
(21
)
Gain (loss) on investments, net
 
2

 
2

Gain (loss) on derivatives, net
 
(5
)
 
(11
)
Pension liability adjustments
 
(1
)
 

Other comprehensive income (loss)
 
3

 
(30
)
Total comprehensive loss
 
(272
)
 
(217
)
Comprehensive (income) loss attributable to noncontrolling interests
 

 
(1
)
Comprehensive loss attributable to Micron
 
$
(272
)
 
$
(218
)





































See accompanying notes to consolidated financial statements.

2



MICRON TECHNOLOGY, INC.

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

As of
 
November 29,
2012
 
August 30,
2012
Assets
 
 
 
 
Cash and equivalents
 
$
2,102

 
$
2,459

Short-term investments
 
169

 
100

Receivables
 
1,139

 
1,289

Inventories
 
1,831

 
1,812

Other current assets
 
74

 
98

Total current assets
 
5,315

 
5,758

Long-term marketable investments
 
527

 
374

Property, plant and equipment, net
 
7,199

 
7,103

Equity method investments
 
343

 
389

Intangible assets, net
 
359

 
371

Other noncurrent assets
 
324

 
333

Total assets
 
$
14,067

 
$
14,328

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
1,584

 
$
1,641

Deferred income
 
227

 
248

Equipment purchase contracts
 
61

 
130

Current portion of long-term debt
 
266

 
224

Total current liabilities
 
2,138

 
2,243

Long-term debt
 
3,169

 
3,038

Other noncurrent liabilities
 
574

 
630

Total liabilities
 
5,881

 
5,911

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,021.0 shares issued and outstanding (1,017.7 as of August 30, 2012)
 
102

 
102

Additional capital
 
8,961

 
8,920

Accumulated deficit
 
(1,677
)
 
(1,402
)
Accumulated other comprehensive income
 
83

 
80

Total Micron shareholders' equity
 
7,469

 
7,700

Noncontrolling interests in subsidiaries
 
717

 
717

Total equity
 
8,186

 
8,417

Total liabilities and equity
 
$
14,067

 
$
14,328








See accompanying notes to consolidated financial statements.

3



MICRON TECHNOLOGY, INC.

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

Quarter ended
 
November 29,
2012
 
December 1,
2011
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(275
)
 
$
(187
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation expense and amortization of intangible assets
 
457

 
564

Amortization of debt discount and other costs
 
28

 
17

Equity in net loss of equity method investees
 
52

 
74

Stock-based compensation
 
19

 
20

Change in operating assets and liabilities:
 
 

 
 

Receivables
 
98

 
101

Inventories
 
(26
)
 
(17
)
Accounts payable and accrued expenses
 
(109
)
 
(97
)
Customer prepayments
 
(36
)
 
(5
)
Deferred income
 
(21
)
 
(37
)
Other
 
49

 
(29
)
Net cash provided by operating activities
 
236

 
404

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant and equipment
 
(434
)
 
(697
)
Purchases of available-for-sale securities
 
(317
)
 

Proceeds from sales and maturities of available-for-sale securities
 
109

 

Proceeds from sales of property, plant and equipment
 
6

 
9

Other
 
(3
)
 
(26
)
Net cash used for investing activities
 
(639
)
 
(714
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of debt
 
173

 

Proceeds from equipment sale-leaseback transactions
 
26

 
110

Cash received for capped call transactions
 
24

 

Cash received from noncontrolling interests
 

 
138

Payments on equipment purchase contracts
 
(104
)
 
(49
)
Repayments of debt
 
(52
)
 
(48
)
Distributions to noncontrolling interests
 

 
(83
)
Other
 
(21
)
 
(3
)
Net cash provided by financing activities
 
46

 
65

 
 
 
 
 
Net decrease in cash and equivalents
 
(357
)
 
(245
)
Cash and equivalents at beginning of period
 
2,459

 
2,160

Cash and equivalents at end of period
 
$
2,102

 
$
1,915

 
 
 
 
 
Noncash investing and financing activities:
 
 

 
 

Equipment acquisitions on contracts payable and capital leases
 
59

 
192


See accompanying notes to consolidated financial statements.

4



MICRON TECHNOLOGY, INC.

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

Business and Basis of Presentation

Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise) is a global manufacturer and marketer of semiconductor devices, principally NAND Flash, DRAM and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. In addition, we manufacture components for CMOS image sensors and other semiconductor products. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 30, 2012. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our consolidated financial position and our consolidated results of operations and cash flows. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our first quarters of fiscal 2013 and 2012 ended on November 29, 2012 and December 1, 2011, respectively. 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 30, 2012.


Variable Interest Entities

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

Unconsolidated Variable Interest Entities

Inotera: Inotera Memories, Inc. ("Inotera") is a VIE because (1) its equity is not sufficient to permit it to finance its activities without additional support from its shareholders and (2) of the terms of its supply agreement with us and Nanya Technology Corporation ("Nanya"). We have determined that we do not have the power to direct the activities of Inotera that most significantly impact its economic performance, primarily due to (1) limitations on our governance rights that require the consent of other parties for key operating decisions and (2) Inotera's dependence on Nanya for financing and the ability to operate in Taiwan. Therefore, we account for our interest in Inotera under the equity method.

Transform: Transform Solar Pty Ltd. ("Transform") is a VIE because its equity is not sufficient to permit it to finance its activities without additional financial support from us or Origin Energy Limited ("Origin"). We have determined that we do not have the power to direct the activities of Transform that most significantly impact its economic performance, primarily due to limitations on our governance rights that require the consent of Origin for key operating decisions. Therefore, we account for our interest in Transform under the equity method. In May 2012, the Board of Directors of Transform approved a liquidation plan. As of August 30, 2012, Transform's operations were substantially discontinued.

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


5



EQUVO Entities: EQUVO HK Limited and EQUVA Capital 1 Pte. Ltd. (together the "EQUVO Entities") are special purpose entities created to facilitate equipment sale-leaseback financing transactions between us and a consortium of financial institutions. Neither we nor the financial institutions have an equity interest in the EQUVO Entities. The EQUVO Entities are VIEs because their equity is not sufficient to permit them to finance their activities without additional support from the financial institutions and because the third-party equity holder lacks characteristics of a controlling financial interest. By design, the arrangement with the EQUVO Entities is merely a financing vehicle and we do not bear any significant risks from variable interests with the EQUVO Entities. Therefore, we have determined that we do not have the power to direct the activities of the EQUVO Entities that most significantly impact their economic performance and we do not consolidate the EQUVO Entities.

Consolidated Variable Interest Entities

IMFT: IM Flash Technologies, LLC ("IMFT") is a VIE because all of its costs are passed to us and its other member, Intel Corporation ("Intel"), through product purchase agreements and IMFT is dependent upon us or Intel for any additional cash requirements.  We determined that we have the power to direct the activities of IMFT that most significantly impact its economic performance.  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.  In addition, IMFT manufactures certain products exclusively for us using our technology.  We also determined that we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it.  Therefore, we consolidate IMFT.

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

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


Elpida Memory, Inc.

Elpida Sponsor Agreement

On July 2, 2012, we entered into a sponsor agreement (the "Sponsor Agreement") with the trustees of Elpida Memory, Inc. ("Elpida") and its subsidiary, Akita Elpida Memory, Inc. ("Akita" and, together with Elpida, the "Elpida Companies"). The Elpida Companies filed petitions for corporate reorganization proceedings with the Tokyo District Court (the "Court") under the Corporate Reorganization Act of Japan on February 27, 2012.

Under the Sponsor Agreement, we committed to support plans of reorganization for the Elpida Companies that would provide for payments to the secured and unsecured creditors of the Elpida Companies in an aggregate amount of 200 billion yen (or $2.44 billion, assuming approximately 82 yen per U.S. dollar, the exchange rate as of November 29, 2012), less certain expenses of the reorganization proceedings and certain other items. As a condition of the Sponsor Agreement, we deposited 1.8 billion yen (or $22 million) into an escrow account in July 2012 which will be applied to the share acquisition payments at closing. Of the aggregate amount, we will fund 60 billion yen (or $731 million) through a cash payment to Elpida at the closing, in exchange for 100% ownership of Elpida's equity. The remaining 140 billion yen (or $1.71 billion) of payments will be made by the Elpida Companies in six annual installments payable at the end of each calendar year beginning in 2014, with payments of 20 billion yen (or $244 million) in each of 2014 through 2017, and payments of 30 billion yen (or $365 million) in each of 2018 and 2019.


6



We have agreed to provide additional financial support to Elpida, subject to certain conditions, which may include a payment guarantee under certain circumstances, to facilitate its continued access to working capital financing of up to 16 billion yen (or $195 million) from third-party finance sources through the closing of the Elpida share purchase, and to use reasonable efforts to assist Elpida in obtaining up to 5 billion yen (or $61 million) of continued working capital financing from third parties for up to two months following the closing. In addition, subject to certain conditions, we have agreed to use reasonable efforts to assist the Elpida Companies in financing up to 64 billion yen (or $780 million) of eligible capital expenditures incurred through June 30, 2014, including up to 40 billion yen (or $487 million) incurred prior to June 30, 2013, either by providing payment guarantees under certain circumstances, or by providing such financing directly. Failure to close the transaction would not relieve us of our obligations under any guarantees to third party financing sources entered into in connection with any such financing arrangements. As of November 29, 2012, we had provided a payment guarantee related to financing of capital expenditures of 29 million euros (or $38 million). In December 2012, we provided an additional payment guarantee related to financing of capital expenditures of 6 billion yen (or $73 million). Our obligations under these guarantee arrangements are collateralized by rights to certain equipment and other assets of Elpida.

Under applicable Japanese law, following the closing of the transaction, because a portion of the payments to creditors will be satisfied through the installment payments described above, the operation of the businesses of the Elpida Companies will remain subject to the oversight of the Court in charge of the reorganization proceedings and of the trustees (including a trustee nominated by us upon the closing of the transaction).

The Sponsor Agreement contains certain termination rights, including our right to terminate the Sponsor Agreement if a change, taken together with all other changes, occurs that is or would reasonably be expected to be materially adverse to (i) the business, assets, etc. of Elpida and its subsidiaries, taken as a whole, or to the business, assets, etc. taken as a whole of Rexchip Electronics Corporation ("Rexchip"), a Taiwanese corporation formed as a manufacturing joint venture by Elpida and Powerchip Technology Corporation ("Powerchip"), a Taiwanese corporation; or (ii) our ability to operate Elpida's business immediately following closing in substantially the same manner as conducted by Elpida as of July 2, 2012.  Elpida currently owns, directly and indirectly through a subsidiary, approximately 65% of Rexchip's outstanding common stock.

The trustees of the Elpida Companies submitted plans of reorganization to the Court on August 21, 2012, which plans are subject to court and creditor approval under applicable Japanese law.  The Sponsor Agreement provides that the plans of reorganization submitted by the trustees are to contain terms consistent with the provisions of the Sponsor Agreement. Certain creditors of Elpida have challenged the proposed plan of reorganization submitted by the trustees and proposed an alternative plan of reorganization. On October 31, 2012, the Court approved submission of the plans of reorganization as submitted by the trustees of the Elpida Companies to creditors for approval. The Court also issued an order that the alternative plan of reorganization proposed by certain creditors of Elpida not be submitted to a creditor vote. The deadline for creditors to vote on the plans of reorganization is February 26, 2013.

The consummation of the Sponsor Agreement is subject to various closing conditions, including but not limited to approval by the Court, requisite creditor approval, receipt of approvals in bankruptcy proceedings in other jurisdictions and receipt of regulatory approvals in other countries, including the People's Republic of China. The transaction is currently anticipated to close in the first half of calendar 2013.

Rexchip Share Purchase Agreement

On July 2, 2012, we entered into a share purchase agreement with Powerchip and certain of its affiliates (the "Rexchip Share Purchase Agreement"), under which we will purchase approximately 714 million shares of Rexchip common stock, which represents approximately 24% of Rexchip's outstanding common stock, for approximately 10 billion New Taiwan dollars (or $343 million, assuming approximately 29 New Taiwan dollars per U.S. dollar, the exchange rate as of November 29, 2012). The consummation of the Rexchip Share Purchase Agreement is subject to various closing conditions, including the closing of the transactions contemplated by the Sponsor Agreement. At the closing of the Sponsor Agreement and the Rexchip Share Purchase Agreement, our aggregate beneficial ownership interest in Rexchip will approximate 89%.


7



Currency Hedging

Elpida Hedges: On July 2, 2012, we executed a series of separate currency exchange transactions pursuant to which we purchased call options to buy 200 billion yen with a weighted-average strike price of 79.15 (yen per U.S. dollar). In addition, to reduce the cost of these call options, we sold put options to sell 100 billion yen with a strike price of 83.32 and we sold call options to buy 100 billion yen with a strike price of 75.57. The net cost of these call and put options, which expire on April 3, 2013, of $49 million is payable upon settlement. These currency options mitigate the risk of a strengthening yen for our yen-denominated payments under the Sponsor Agreement while preserving some ability for us to benefit if the value of the yen weakens relative to the U.S. dollar.  These option contracts were not designated for hedge accounting and are remeasured at fair value each period with gains and losses reflected in our results of operations.

As a result of the weaker yen since the inception of the hedge on July 2, 2012, the U.S. dollar equivalent of the 200 billion yen to be paid to the secured and unsecured creditors of the Elpida Companies decreased by $70 million as of November 29, 2012. As a result of the mark-to-market adjustments of the hedge, we have recorded cumulative losses in other operating expense of $53 million.

Rexchip Hedges: On July 25, 2012, we executed a series of separate currency exchange transactions pursuant to which we purchased call options to buy 10 billion New Taiwan dollars with a weighted-average strike price of 29.21 (New Taiwan dollar per U.S. dollar). The cost of these options, which expire on April 2, 2013, of $3 million is payable upon settlement. These currency options mitigate the risk of a strengthening New Taiwan dollar for our payments under the Rexchip Share Purchase Agreement.  These option contracts were not designated for hedge accounting and are remeasured at fair value each period with gains and losses reflected in our results of operations.


Investments

As of November 29, 2012 and August 30, 2012, available-for-sale investments, including cash equivalents, were as follows:

As of
 
November 29, 2012
 
August 30, 2012
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
1,733

 
$

 
$

 
$
1,733

 
$
2,159

 
$

 
$

 
$
2,159

Corporate bonds
 
342

 
1

 

 
343

 
233

 
1

 

 
234

Government securities
 
222

 

 

 
222

 
144

 

 

 
144

Asset-backed securities
 
113

 

 

 
113

 
77

 

 

 
77

Commercial paper
 
64

 

 

 
64

 
39

 

 

 
39

Certificates of deposit
 
52

 

 

 
52

 
31

 

 

 
31

Marketable equity securities
 
10

 
2

 

 
12

 
10

 

 

 
10

 
 
$
2,536

 
$
3

 
$

 
$
2,539

 
$
2,693

 
$
1

 
$

 
$
2,694


As of November 29, 2012, no available-for-sale security had been in a loss position for longer than 12 months.


8



The table below presents the amortized cost and fair value of available-for-sale debt securities as of November 29, 2012 by contractual maturity:

 
 
Amortized Cost
 
Fair Value
Money market funds not due at a single maturity date
 
$
1,733

 
$
1,733

Due in 1 year or less
 
279

 
279

Due in 1 - 2 years
 
195

 
196

Due in 2 - 4 years
 
291

 
292

Due after 4 years
 
28

 
27

 
 
$
2,526

 
$
2,527


Net unrealized holding gains reclassified out of accumulated other comprehensive income from sales of available-for-sale securities were not significant for the first quarters of 2013 and 2012. Proceeds from the sales of available-for-sale securities were $93 million for the first quarter of 2013 and were not significant for the first quarter of 2012. Gross realized gains from sales of available-for-sale securities were not significant for the first quarters of 2013 and 2012.


Receivables

As of
 
November 29,
2012
 
August 30,
2012
Trade receivables (net of allowance for doubtful accounts of $4 and $5, respectively)
 
$
863

 
$
933

Income and other taxes
 
63

 
80

Related party receivables
 
52

 
63

Other
 
161

 
213

 
 
$
1,139

 
$
1,289


As of November 29, 2012 and August 30, 2012, related party receivables included $52 million and $62 million, respectively, due from Aptina Imaging Corporation ("Aptina") primarily for sales of image sensor products under a wafer supply agreement.  (See "Equity Method Investments" note.)

As of November 29, 2012 and August 30, 2012, other receivables included $10 million and $63 million, respectively, from our foreign currency hedges. As of November 29, 2012 and August 30, 2012, other receivables included $37 million and $34 million, respectively, due from Intel for amounts related to NAND Flash and certain emerging memory technologies product design and process development activities under cost-sharing agreements.  As of November 29, 2012 and August 30, 2012, other receivables also included $6 million and $17 million, respectively, due from Nanya for amounts related to DRAM product design and process development activities under a cost-sharing agreement. (See "Derivative Financial Instruments," "Consolidated Variable Interest Entities" and "Equity Method Investments" notes.)


Inventories

As of
 
November 29,
2012
 
August 30,
2012
Finished goods
 
$
476

 
$
512

Work in process
 
1,209

 
1,148

Raw materials and supplies
 
146

 
152

 
 
$
1,831

 
$
1,812





9



Property, Plant and Equipment

As of
 
November 29,
2012
 
August 30,
2012
Land
 
$
93

 
$
92

Buildings
 
4,759

 
4,714

Equipment
 
16,051

 
15,653

Construction in progress
 
70

 
43

Software
 
324

 
323

 
 
21,297

 
20,825

Accumulated depreciation
 
(14,098
)
 
(13,722
)
 
 
$
7,199

 
$
7,103


Depreciation expense was $437 million and $542 million for the first quarters of 2013 and 2012, respectively. Other noncurrent assets included buildings, equipment, and other assets classified as held for sale of $25 million as of November 29, 2012 and $25 million as of August 30, 2012.


Equity Method Investments

As of
 
November 29, 2012
 
August 30, 2012
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$
326

 
39.7
%
 
$
370

 
39.7
%
Other
 
17

 
Various

 
19

 
Various

 
 
$
343

 
 

 
$
389

 
 


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

Quarter ended
 
November 29,
2012
 
December 1,
2011
Inotera
 
$
(53
)
 
$
(63
)
Other
 
1

 
(11
)
 
 
$
(52
)
 
$
(74
)

Our maximum exposure to loss from our involvement with our equity method investments that were VIEs was $276 million and primarily included our Inotera investment balance as well as related translation adjustments in accumulated other comprehensive income and receivables, if any.  We may also incur losses in connection with our rights and obligations to purchase a portion of Inotera's wafer production capacity under a supply agreement with Inotera.

Inotera

We have partnered with Nanya in Inotera, a Taiwanese DRAM memory company, since the first quarter of 2009.  As of November 29, 2012, we held a 39.7% ownership interest in Inotera, Nanya held a 26.3% ownership interest and the remaining ownership interest was publicly held.

The net carrying value of our initial and subsequent investments was less than our proportionate share of Inotera's equity at the time of those investments.  These differences are being amortized as a net credit to earnings through equity in net loss of equity method investees (the "Inotera Amortization").  In the first quarter of 2012, we recognized $12 million of Inotera Amortization and as of August 30, 2012, the remaining amount of unrecognized Inotera Amortization was not significant.


10



Due to significant market declines in the selling prices of DRAM, Inotera incurred net losses of $410 million for its nine-month period ended September 30, 2012 and $737 million for its fiscal year ended December 31, 2011. Also, Inotera's current liabilities exceeded its current assets by $1.8 billion as of September 30, 2012, which exposes Inotera to liquidity risk. As of June 30, 2012, Inotera was not in compliance with certain loan covenants, and had not been in compliance for the past several years. Inotera received a waiver from complying with the June 30, 2012 financial covenants. Inotera's management has developed plans to improve its liquidity, but there can be no assurance that Inotera will be successful in improving its liquidity, which may result in its lenders requiring repayment of such loans during the next year.

As of November 29, 2012, based on the closing trading price of Inotera's shares in an active market, the market value of our equity interest in Inotera was $167 million, which was below our net carrying value of $270 million. The net carrying value is our investment balance less cumulative translation adjustments in accumulated other comprehensive income (loss). As of November 29, 2012 and August 30, 2012, there were gains of $56 million and $49 million, respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera. We evaluated our investment in Inotera and concluded that the decline in the market value below carrying value was not an other-than-temporary-impairment for a number of reasons including: (1) the market value increased above our carrying value subsequent to the end of the first quarter of 2013 and (2) the difference between market value and carrying value existed for less than two months.

We have a supply agreement with Inotera, under which Nanya is also a party, for the rights and obligations to purchase 50% of Inotera's wafer production capacity (the "Inotera Supply Agreement"). We have rights to receive a higher share of Inotera's 30-nanometer output when it becomes available. Our cost of wafers purchased under the Inotera Supply Agreement is based on a margin-sharing formula among Nanya, Inotera and us. Under such formula, all parties' manufacturing costs related to wafers supplied by Inotera, as well as our and Nanya's revenue for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers acquired from Inotera. Under the Inotera Supply Agreement, we purchased $201 million and $156 million of DRAM products in the first quarters of 2013 and 2012, respectively. In the first quarter of 2012, we recognized losses on our purchase commitment under the Inotera Supply Agreement of $40 million.

Under a cost-sharing arrangement, we generally share DRAM development costs with Nanya. As a result of the cost-sharing arrangement, our research and development ("R&D") costs were reduced by $15 million and $37 million in the first quarters of 2013 and 2012, respectively.  In addition, we recognized royalty revenue from Nanya of $2 million and $3 million in the first quarters of 2013 and 2012, respectively, for sales of DRAM products manufactured by or for Nanya on process nodes of 50nm or higher.

We are currently in discussions with Nanya and Inotera regarding potential changes to our agreements. Such potential changes may include us receiving a significantly higher share of Inotera's output than our current share and an adjustment to the pricing formula. Additionally, our share of DRAM R&D costs may increase.

Other

Transform: In the second quarter of 2010, we acquired a 50% interest in Transform, a developer, manufacturer and marketer of photovoltaic technology and solar panels, from Origin.  As of November 29, 2012, we and Origin each held a 50% ownership interest in Transform.  As a result of the ongoing challenging global environment in the solar industry and unfavorable worldwide supply and demand conditions, in May 2012 the Board of Directors of Transform approved a liquidation plan. As of August 30, 2012, Transform's operations were substantially discontinued.

Aptina: Other equity method investments included a 30.2% equity interest in Aptina. The amount of cumulative loss we recognized from our investment in Aptina through the second quarter of 2012 reduced our investment balance to zero and we ceased recognizing our proportionate share of Aptina's losses.

We manufacture components for CMOS image sensors for Aptina under a wafer supply agreement.  For the first quarters of 2013 and 2012, we recognized net sales of $61 million and $94 million, respectively, from products sold to Aptina, and cost of goods sold of $81 million and $94 million, respectively.




11



Intangible Assets

As of
 
November 29, 2012
 
August 30, 2012
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
578

 
$
(244
)
 
$
575

 
$
(234
)
Customer relationships
 
127

 
(102
)
 
127

 
(98
)
Other
 
1

 
(1
)
 
1

 

 
 
$
706

 
$
(347
)
 
$
703

 
$
(332
)

During the first quarter of 2013 and 2012, we capitalized $9 million and $9 million, respectively, for product and process technology with weighted-average useful lives of 9 years and 10 years, respectively. Amortization expense was $20 million and $22 million for the first quarters of 2013 and 2012, respectively.  Annual amortization expense is estimated to be $82 million for 2013, $77 million for 2014, $59 million for 2015, $51 million for 2016 and $41 million for 2017.


Accounts Payable and Accrued Expenses

As of
 
November 29,
2012
 
August 30,
2012
Accounts payable
 
$
825

 
$
818

Salaries, wages and benefits
 
245

 
290

Related party payables
 
138

 
130

Customer advances
 
132

 
141

Income and other taxes
 
31

 
25

Other
 
213

 
237

 
 
$
1,584

 
$
1,641


As of November 29, 2012 and August 30, 2012, related party payables included $138 million and $130 million, respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement.

As of November 29, 2012 and August 30, 2012, customer advances included $130 million and $139 million, respectively, for amounts received from Intel to be applied to Intel's future purchases under a NAND Flash supply agreement. In addition, as of November 29, 2012 and August 30, 2012, other noncurrent liabilities included $94 million and $120 million, respectively. from this agreement. (See "Consolidated Variable Interest Entities – IM Flash" note.)

As of November 29, 2012 and August 30, 2012, other accounts payable and accrued expenses included $52 million and $51 million, respectively, of amounts payable for purchased currency options in connection with the Sponsor Agreement and Rexchip Share Purchase Agreement. Other accounts payable and accrued expenses as of November 29, 2012 and August 30, 2012 also included $10 million and $3 million, respectively, from our foreign currency hedges. As of November 29, 2012 and August 30, 2012, other accounts payable and accrued expenses included $16 million and $14 million, respectively, due to Intel for NAND Flash product design and process development and licensing fees pursuant to cost-sharing agreements. (See "Derivative Financial Instruments" and "Consolidated Variable Interest Entities – IM Flash" note.)




12



Debt

As of
 
November 29,
2012
 
August 30,
2012
2014 convertible senior notes, due June 2014 at stated rate of 1.875%, effective rate of 7.9%, net of discount of $77 and $89, respectively
 
$
872

 
$
860

Capital lease obligations, due in periodic installments through August 2050 at 4.9%
 
868

 
883

2032C convertible senior notes, due May 2032 at stated rate of 2.375%, effective rate of 6.0%, net of discount of $96 and $99, respectively
 
454

 
451

2032D convertible senior notes, due May 2032 at stated rate of 3.125%, effective rate of 6.3%, net of discount of $87 and $89, respectively
 
363

 
361

2031A convertible senior notes, due August 2031 at stated rate of 1.5%, effective rate of 6.5%, net of discount of $77 and $80, respectively
 
268

 
265

2031B convertible senior notes, due August 2031 at stated rate of 1.875%, effective rate of 7.0%, net of discount of $99 and $102, respectively
 
246

 
243

Term note payable, due in periodic installments through October 2017 at stated rate of 2.4%
 
173

 

2027 convertible senior notes, due June 2027 at stated rate of 1.875%, effective rate of 6.9%, net of discount of $33 and $34, respectively
 
142

 
141

Intel senior note, due in periodic installments through April 2014 at variable rate
 
49

 
58

 
 
3,435

 
3,262

Less current portion
 
(266
)
 
(224
)
 
 
$
3,169

 
$
3,038


Capital Lease Obligations

In the first quarter of 2013, we received $26 million in proceeds from equipment sale-leaseback transactions and as a result recorded capital lease obligations aggregating $26 million at a weighted-average effective interest rate of 4.6%, payable in periodic installments through November 2016.

Term Note Payable

On October 2, 2012, we entered into a facility agreement to obtain financing collateralized by semiconductor production equipment.  Subject to customary conditions, we can draw up to $214 million under the facility agreement prior to April 4, 2013.  Amounts drawn are payable in 10 equal semi-annual installments beginning six months after the draw date.  On October 18, 2012, we drew $173 million with interest at 2.4% per annum.  Additional amounts drawn will bear interest, at our option, at either (i) a fixed rate negotiated at the time of the draw request or (ii) a floating rate equal to the six-month LIBOR rate plus 1.6% per annum.  The facility agreement contains customary covenants.

Revolving Credit Facility

On September 5, 2012, we entered into a three-year revolving credit facility. Under this credit facility, we can draw up to the lesser of $255 million or 80% of the net outstanding balance of a pool of certain trade receivables. We granted a security interest in such receivables to collateralize the facility. The availability of the facility is subject to certain customary conditions, including the absence of any event or circumstance that has a material adverse effect on our business or financial condition. Interest is payable monthly on any outstanding principal balance at a variable rate equal to the 30-day Singapore Interbank Offering Rate ("SIBOR") plus 2.8% per annum. As of November 29, 2012, we had not drawn any amounts under this facility.


Contingencies

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

13




Patent Matters

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

We are engaged in litigation with Rambus, Inc. ("Rambus") relating to certain of Rambus' patents and certain of our claims and defenses. Our lawsuits with Rambus are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy. On August 28, 2000, we filed a complaint against Rambus in the U.S. District Court for the District of Delaware seeking declaratory and injunctive relief. The complaint alleges, among other things, various anticompetitive activities and also seeks a declaratory judgment that certain Rambus patents are invalid and/or unenforceable. Rambus subsequently filed an answer and counterclaim in Delaware alleging, among other things, infringement of twelve Rambus patents and seeking monetary damages and injunctive relief. We subsequently added claims and defenses based on Rambus' alleged spoliation of evidence and litigation misconduct. The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007. On January 9, 2009, Judge Robinson entered an opinion in our favor holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against us. Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit. On May 13, 2011, the Federal Circuit affirmed Judge Robinson's finding of spoliation, but vacated the dismissal sanction and remanded the case to the Delaware District Court for analysis of the remedy based on the Federal Circuit's decision. On January 2, 2013, Judge Robinson entered a new opinion in our favor holding that Rambus had engaged in spoliation, that Rambus' spoliation was done in bad faith, that the spoliation prejudiced us, and that the appropriate sanction was to declare the twelve Rambus patents in the suit unenforceable against us.  On January 13, 2006, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that certain of our DDR2, DDR3, RLDRAM and RLDRAM II products infringe as many as fourteen Rambus patents and seeking monetary damages, treble damages, and injunctive relief. The Northern District of California Court stayed the trial of the patent phase of the Northern District of California case upon appeal of the Delaware spoliation issue to the Federal Circuit.

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

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

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

On December 5, 2011, the Board of Trustees for the University of Illinois filed a patent infringement action against us in the U.S. District Court for the Central District of Illinois. The complaint alleges that unspecified semiconductor products of ours infringe three U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs. We have filed three petitions for inter-partes review by the Patent and Trademark Office, challenging the validity of each of the patents in suit. The District Court has stayed the litigation pending the outcome of the inter-partes review by the Patent Office.

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

On April 27, 2012, Semcon Tech, LLC filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that our use of various chemical mechanical planarization systems purchased from Applied Materials and others infringes a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs.

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


14



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

Antitrust Matters

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers which alleged that the defendants harmed Rambus by engaging in concerted and unlawful efforts affecting Rambus DRAM by eliminating competition and stifling innovation in the market for computer memory technology and computer memory chips.  Rambus' complaint alleged various causes of action under California state law including, among other things, a conspiracy to restrict output and fix prices, a conspiracy to monopolize, intentional interference with prospective economic advantage, and unfair competition. Rambus sought a judgment for damages of approximately $3.9 billion, joint and several liability, trebling of damages awarded, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys' fees and costs. Trial began on June 20, 2011, and the case went to the jury on September 21, 2011. On November 16, 2011, the jury found for us on all claims. On April 2, 2012, Rambus filed a notice of appeal to the California 1st District Court of Appeal.

At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging a conspiracy to increase DRAM prices in violation of federal and state antitrust laws and state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys' fees. A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings. In July, 2006, the Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California. The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law. On June 23, 2010, we executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States. Subject to certain conditions, including final court approval of the class settlements, we agreed to pay approximately $67 million in aggregate in three equal installments over a two-year period. As of November 29, 2012, we had paid the full amount into an escrow account in accordance with the settlement agreement.

Three putative class action lawsuits alleging price-fixing of DRAM products also have been filed against us in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, asserting violations of the Canadian Competition Act and other common law claims (collectively the "Canadian Cases").  The claims were initiated between December 2004 (British Columbia) and June 2006 (Quebec). The plaintiffs seek monetary damages, restitution, costs, and attorneys' fees. The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States.  Plaintiffs' motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively.  Plaintiffs subsequently filed an appeal of each of those decisions.  On November 12, 2009, the British Columbia Court of Appeal reversed, and on November 16, 2011, the Quebec Court of Appeal also reversed the denial of class certification and remanded the cases for further proceedings. On October 16, 2012, we entered into a settlement agreement resolving these three putative class action cases subject to certain conditions including final court approval of the settlement. The settlement amount did not have a material effect on our business, results of operations or financial condition.

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice ("SDE") announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry. The SDE's Notice of Investigation names various DRAM manufacturers and certain executives, including us, and focuses on the period from July 1998 to June 2002.

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


15



Commercial Matters

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda AG ("Qimonda") insolvency proceedings, filed suit against us and Micron Semiconductor B.V., our Netherlands subsidiary, in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between us and Qimonda signed in fall 2008 pursuant to which we purchased all of Qimonda's shares of Inotera Memories, Inc. and seeks an order requiring us to retransfer the Inotera shares purchased from Qimonda to the Qimonda estate. The complaint also seeks to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross license between us and Qimonda entered into at the same time as the share purchase agreement. A three-judge panel will render a decision after a series of hearings with pleadings, arguments and witnesses. A first hearing was held on September 25, 2012. The next hearing is scheduled for February 5, 2013. We are unable to predict the outcome of this lawsuit and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera shares or equivalent monetary damages and the termination of the patent cross license, which could have a material adverse effect on our business, results of operation or financial condition. As of November 29, 2012, the Inotera shares purchased from Qimonda had a net carrying value of $149 million.

Other

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.

Under the Sponsor Agreement, we have provided payment guarantees related to financing of capital expenditures. (See "Elpida Memory, Inc." note.)


Micron Shareholders' Equity and Noncontrolling Interests in Subsidiaries

Changes in the components of equity were as follows:

 
 
Quarter Ended November 29, 2012
 
Quarter Ended December 1, 2011
 
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
Beginning balance
 
$
7,700

 
$
717

 
$
8,417

 
$
8,470

 
$
1,382

 
$
9,852

 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
(275
)
 

 
(275
)
 
(187
)
 

 
(187
)
Other comprehensive income (loss)
 
3

 

 
3

 
(31
)
 
1

 
(30
)
Comprehensive income (loss)
 
(272
)
 

 
(272
)
 
(218
)
 
1

 
(217
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Contribution from noncontrolling interests
 

 

 

 

 
138

 
138

Distributions to noncontrolling interests
 

 

 

 

 
(83
)
 
(83
)
Capital and other transactions attributable to Micron
 
41

 

 
41

 
19

 

 
19

Ending balance
 
$
7,469

 
$
717

 
$
8,186

 
$
8,271

 
$
1,438


$
9,709



16



2009 Capped Call Transactions

Concurrent with the offering of the 2013 Notes in April 2009, we entered into capped call transactions (the "2009 Capped Calls") covering approximately 45.2 million shares of common stock with an initial strike price of approximately $5.08 per share and a cap price of $6.64 per share.  The 2009 Capped Calls expired in October 2012 and November 2012.  We elected cash settlement and received $24 million in the first quarter of 2013.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, at the end of each period, as well as the activity for the quarter ended November 29, 2012, were as follows:


 
August 30,
2012
 
Other Comprehensive Income
 
November 29, 2012
Cumulative foreign currency translation adjustments
 
$
49

 
$
7

 
$
56

Gain (loss) on derivatives, net
 
31

 
(5
)
 
26

Gain (loss) on investments, net
 
1

 
2

 
3

Pension liability adjustments
 
(1
)
 
(1
)
 
(2
)
Accumulated other comprehensive income
 
$
80

 
$
3

 
$
83



Derivative Financial Instruments

We are exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the euro, shekel, Singapore dollar and yen.  We are also exposed to currency exchange rate risk for capital expenditures and operating cash flows, primarily denominated in the euro and yen.  In connection with the Sponsor Agreement and Rexchip Share Purchase Agreement entered into in July 2012, we are exposed to significant currency exchange rate risk for the yen and New Taiwan dollar. We use derivative instruments to manage our exposures to changes in currency exchange rates.  For exposures associated with our monetary assets and liabilities, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on our earnings.  For exposures associated with our capital expenditures and operating cash flows, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows. For exposures associated with our yen or New Taiwan dollar denominated payment obligations under the Sponsor Agreement and Rexchip Share Purchase Agreement, our primary objective for entering into currency derivatives is to mitigate risks if those currencies strengthen relative to the U.S. dollar, while preserving some ability for us to benefit if those currencies weaken.

Our derivatives consist primarily of currency forward contracts and currency options.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  As of November 29, 2012, our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts, was equal to the fair value of our assets for these contracts as listed in the tables below.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, we monitor the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.  We have the following currency risk management programs:

Currency Derivatives without Hedge Accounting Designation

We utilize a rolling hedge strategy with currency forward contracts that generally mature within 35 days to hedge our exposure to changes in currency exchange rates from our monetary assets and liabilities.  At the end of each reporting period, monetary assets and liabilities held or denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (referred to as Level 2).  Realized and unrealized gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other operating (income) expense.


17



In connection with the currency exchange rate risk with the Sponsor Agreement and Rexchip Share Purchase Agreement, we entered into currency options that expire on April 3, 2013 and April 2, 2013, respectively. Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (referred to as Level 2).  These options are marked-to-market at the end of each reporting period and realized and unrealized gains and losses are included in other operating (income) expense.

Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

Currency
 
Notional Amount (in U.S. Dollars)
 
Fair Value of
Asset (1)
 
(Liability) (2)
As of November 29, 2012
 
 
 
 
 
 
Forward contracts:
 
 
 
 
 
 
Euro
 
$
224

 
$
2

 
$
(1
)
Singapore dollar
 
173

 

 

Shekel
 
67

 
1

 

Yen
 
34

 

 
(1
)
Currency options:
 
 
 
 
 
 
Yen
 
5,050

(3) 

 
(5
)
New Taiwan dollar
 
342

 
6

 

 
 
$
5,890

 
$
9

 
$
(7
)
 
 
 
 
 
 
 
As of August 30, 2012
 
 

 
 

 
 

Forward contracts:
 
 
 
 
 
 
Euro
 
$
173

 
$
2

 
$
(1
)
Singapore dollar
 
251

 

 
(1
)
Shekel
 
65

 

 
(1
)
Yen
 
18

 

 

Currency options:
 
 
 
 
 
 
Yen
 
5,050

(3) 
57

 

New Taiwan dollar
 
342

 
2

 

 
 
$
5,899

 
$
61


$
(3
)
(1) 
Included in receivables – other.
(2) 
Included in accounts payable and accrued expenses – other.
(3) 
Notional amount includes purchased options of $2,527 million and sold options of $2,523 million.

For currency forward contracts and options without hedge accounting designation, we recognized net losses of $51 million and $20 million for the first quarters of 2013 and 2012, respectively, which were included in other operating (income) expense.


18



Currency Derivatives with Cash Flow Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months and currency options that generally mature from 12 to 18 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures and forecasted operating cash flows.  Currency forward contracts are valued at their fair values based on market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread (referred to as Level 2).  Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (referred to as Level 2). For derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives was included as a component of accumulated other comprehensive income (loss).  For derivatives hedging capital expenditures, the amounts in accumulated other comprehensive income (loss) for these cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operation and in the same periods in which the underlying transactions affect earnings. Amounts in accumulated other comprehensive income (loss) for inventory purchases are reclassified to earnings when inventory is sold. The ineffective or excluded portion of the realized and unrealized gain or loss is included in other operating (income) expense.  Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:

 
 
Notional Amount       (in U.S. Dollars)
 
Fair Value of
Currency
 
 
Asset (1)
 
(Liability) (2)
As of November 29, 2012
 
 
 
 
 
 
Forward contracts:
 
 
 
 
 
 
Yen
 
$
82

 
$

 
$
(3
)
Euro
 
40

 
1

 

Currency options:
 
 
 
 
 
 
Yen
 
40

 

 

 
 
$
162

 
$
1

 
$
(3
)
As of August 30, 2012
 
 

 
 

 
 

Forward contracts:
 
 
 
 
 
 
Yen
 
$
108

 
$
2

 
$

Euro
 
35

 

 

Currency options:
 
 
 
 
 
 
Yen
 
32

 

 

 
 
$
175

 
$
2

 
$

(1) 
Included in receivables – other.
(2) 
Included in accounts payable and accrued expenses – other.

For the first quarters of 2013 and 2012, we recognized net pre-tax derivative losses of $4 million and $9 million, respectively, in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other operating (income) expense were not significant in the first quarters of 2013 and 2012.  In the first quarters of 2013 and 2012, $3 million and $2 million, respectively, of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings. As of November 29, 2012, the amount of pre-tax net derivative gains included in accumulated other accumulated comprehensive income (loss) expected to be reclassified into earnings in the next 12 months was $6 million.


Fair Value Measurements

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


19



Fair Value Measurements on a Recurring Basis

All marketable debt and equity investments are classified as available-for-sale and are carried at fair value. Assets measured at fair value on a recurring basis were as follows:

As of
 
November 29, 2012
 
August 30, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
1,733

 
$

 
$

 
$
1,733

 
$
2,159

 
$

 
$

 
$
2,159

Commercial paper
 

 
48

 

 
48

 

 
29

 

 
29

Certificates of deposit
 

 
47

 

 
47

 

 
27

 

 
27

Government securities
 

 
10

 

 
10

 

 
5

 

 
5

Corporate bonds
 

 
5

 

 
5

 

 

 

 

 
 
1,733

 
110

 

 
1,843

 
2,159

 
61

 

 
2,220

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 

 
99

 

 
99

 

 
51

 

 
51

Corporate bonds
 

 
45

 

 
45

 

 
31

 

 
31

Commercial paper
 

 
16

 

 
16

 

 
10

 

 
10

Certificates of deposit
 

 
5

 

 
5

 

 
4

 

 
4

Asset-backed securities
 

 
4

 

 
4

 

 
4

 

 
4

 
 

 
169

 

 
169

 

 
100

 

 
100

Long-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
293

 

 
293

 

 
203

 

 
203

Government securities
 

 
113

 

 
113

 

 
88

 

 
88

Asset-backed securities
 

 
109

 

 
109

 

 
73

 

 
73

Marketable equity securities
 
6

 
6

 

 
12

 
5

 
5

 

 
10

 
 
6

 
521

 

 
527

 
5

 
369

 

 
374

Noncurrent assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets held for sale
 

 

 
25

 
25

 

 

 
25

 
25

 
 

 

 
25

 
25

 

 

 
25

 
25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,739

 
$
800

 
$
25

 
$
2,564

 
$
2,164

 
$
530

 
$
25

 
$
2,719


Government securities consist of securities issued directly by or deemed to be guaranteed by government entities such as U.S. and non-U.S. agency securities, government bonds and treasury securities. Level 2 securities are valued 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 analysis to validate information obtained from our pricing services. As of November 29, 2012, no adjustments were made to such pricing information.

Level 3 assets consisted primarily of semiconductor equipment and facilities classified as held for sale. Fair value for semiconductor equipment was based on quotations obtained from equipment dealers, which consider the remaining useful life and configuration of the equipment. Fair value for facilities was determined based on sales of similar facilities and properties in comparable markets. Losses recognized in the first quarters of 2013 and 2012 due to fair value measurements using Level 3 inputs were not significant. For the first quarters of 2013 and 2012, activity of assets held for sale was not significant.


20



Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (carrying value excludes the equity components of our convertible notes classified in equity) were as follows:

As of
 
November 29, 2012
 
August 30, 2012
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Convertible notes
 
$
2,638

 
$
2,345

 
$
2,669

 
$
2,321

Other notes
214

 
222

 
56

 
58


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


Equity Plans

As of November 29, 2012, we had an aggregate of 160.3 million shares of common stock reserved for the issuance of stock options and restricted stock awards, of which 99.4 million shares were subject to outstanding awards and 60.9 million shares were available for future awards.  Awards are subject to terms and conditions as determined by our Board of Directors.

Stock Options

We granted 3.9 million and 5.9 million stock options during the first quarters of 2013 and 2012, respectively, with weighted-average grant-date fair values per share of $2.99 and $2.95, respectively.

The fair values of option awards were estimated at each grant date using the Black-Scholes option valuation model.  The Black-Scholes model requires the input of assumptions, including the expected stock price volatility and estimated option life.  The expected volatilities utilized were based on implied volatilities from traded options on our stock and on historical volatility.  The expected lives of options granted were based, in part, on historical experience and on the terms and conditions of the options.  The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date.  No dividends were assumed in estimated option values.  Assumptions used in the Black-Scholes model are presented below:

Quarter ended
 
November 29,
2012
 
December 1,
2011
Average expected life in years
 
5.0

 
5.1

Weighted-average expected volatility
 
62
%
 
67
%
Weighted-average risk-free interest rate
 
0.7
%
 
1.1
%


21



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

As of November 29, 2012, there were 11.5 million shares of Restricted Stock Awards outstanding, of which 3.5 million were performance-based Restricted Stock Awards.  For service-based Restricted Stock Awards, restrictions generally lapse in one-fourth increments during each year of employment after the grant date.  For performance-based Restricted Stock Awards, vesting is contingent upon meeting certain performance goals. Restricted Stock Awards granted for the first quarter of 2013 and 2012 were as follows:

Quarter ended
 
November 29,
2012
 
December 1,
2011
Service-based awards
 
2.2

 
1.8

Performance-based awards
 
1.2

 
1.9

Weighted-average grant-date fair values per share
 
$
5.73

 
$
5.17


Stock-based Compensation Expense

Total compensation costs for our equity plans were as follows:
Quarter ended
 
November 29,
2012
 
December 1,
2011
Stock-based compensation expense by caption:
 
 
 
 
Cost of goods sold
 
$
6

 
$
5

Selling, general and administrative
 
9

 
11

Research and development
 
4

 
4

 
 
$
19

 
$
20

 
 
 
 
 
Stock-based compensation expense by type of award:
 
 
 
 
Stock options
 
$
13

 
$
12

Restricted stock awards
 
6

 
8

 
 
$
19

 
$
20


As of November 29, 2012, $149 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards was expected to be recognized through the first quarter of 2017, resulting in a weighted-average period of 1.2 years. Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with our treatment of income or loss from our U.S. operations.  (See "Income Taxes" note.)


Other Operating (Income) Expense, Net

Quarter ended
 
November 29,
2012
 
December 1,
2011
(Gain) loss from changes in currency exchange rates
 
$
59

 
$
11

(Gain) loss on disposition of property, plant and equipment
 
(5
)
 
1

Other
 
(23
)
 
(6
)
 
 
$
31

 
$
6


Other operating expense in the first quarter of 2013 included currency losses of $62 million from changes in the market value of yen currency hedges executed in connection with our planned acquisition of Elpida Memory, Inc. In addition, other operating income included a gain of $25 million resulting from the termination of a lease by Transform to a portion of our manufacturing facilities in Boise, Idaho.




22



Income Taxes
   
Income taxes for the first quarter of 2012 included a tax benefit of $14 million related to the favorable resolution of certain prior year tax matters, which was previously reserved as an uncertain tax position.  Remaining taxes for the first quarters of 2013 and 2012 primarily reflect taxes on our non-U.S. operations. We have a valuation allowance for our net deferred tax asset associated with our U.S. operations.  The provision (benefit) for taxes on U.S. operations in the first quarters of 2013 and 2012 was substantially offset by changes in the valuation allowance.

We currently operate in several tax jurisdictions where we have arrangements that allow us to compute our tax provision at rates below the local statutory rates that expire in whole or in part at various dates through 2026.  These arrangements benefitted our tax provision in the first quarter of 2013 by $11 million ($0.01 per diluted share) and were not significant in the first quarter of 2012.


Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding.  Diluted earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding plus the dilutive effects of equity awards and convertible notes.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from diluted earnings per share calculations.  Antidilutive potential common shares that could dilute basic earnings per share in the future were 356.8 million and 285.5 million for the first quarters of 2013 and 2012, respectively.

Quarter ended
 
November 29,
2012
 
December 1,
2011
Net loss available to Micron shareholders - basic and diluted
 
$
(275
)
 
$
(187
)
 
 
 
 
 
Weighted-average common shares outstanding - basic and diluted
 
1,013.7

 
981.4

 
 
 
 
 
Loss per share:
 
 
 
 
Basic
 
$
(0.27
)
 
$
(0.19
)
Diluted
 
(0.27
)
 
(0.19
)


Consolidated Variable Interest Entities

IM Flash

IMFT: Since its inception in 2006 through November 29, 2012, we have owned 51% of IMFT, a venture between us and Intel, to manufacture NAND Flash memory products and, since the third quarter of 2012, certain emerging memory technologies, for the exclusive use of the members. IMFT is governed by a Board of Managers and the number of managers appointed by each member to the board varies based on the members' respective ownership interests, which is based on contributions to IMFT. The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights, commencing in 2015, pursuant to which Intel may elect to sell to us, or we may elect to purchase from Intel, Intel's interest in IMFT. If Intel elects to sell, we would set the closing date of the transaction within two years following such election and could elect to receive financing of the purchase price from Intel for one to two years from the closing date.


23



The following table presents the assets and liabilities of IMFT included in our consolidated balance sheets, excluding intercompany balances:

As of
 
November 29,
2012
 
August 30, 2012
Assets
 
 
 
 
Cash and equivalents
 
$
56

 
$
157

Receivables
 
66

 
78

Inventories
 
62

 
67

Other current assets
 
3

 
5

Total current assets
 
187

 
307

Property, plant and equipment, net
 
1,389

 
1,342

Other noncurrent assets
 
40

 
36

Total assets
 
$
1,616

 
$
1,685

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
88

 
$
104

Deferred income
 
9

 
10

Equipment purchase contracts
 
1

 
58

Current portion of long-term debt
 
6

 
6

Total current liabilities
 
104

 
178

Long-term debt
 
17

 
18

Other noncurrent liabilities
 
124

 
129

Total liabilities
 
$
245

 
$
325


Our ability to access IMFT's cash and investments to finance our other operations is subject to agreement by Intel. Creditors of IMFT have recourse only to its assets and do not have recourse to any other of our assets.

IMFT manufactures NAND Flash memory products using designs and technology we develop with Intel. We generally share with Intel the cost of product design, other NAND Flash R&D costs and, since the third quarter of 2012, the R&D cost of certain emerging memory technologies. Our R&D expenses were reduced by reimbursements from Intel of $32 million and $22 million for the first quarters of 2013 and 2012, respectively.

IMFS: We partnered with Intel in 2007 to form IM Flash Singapore, LLP ("IMFS") to manufacture NAND Flash memory products for the exclusive use of the members. In the third quarter of 2012, we acquired Intel's remaining interest in IMFS and terminated IMFS' supply agreement with us and Intel.

Supply Agreements: IMFT sells products to the joint venture members generally in proportion to their ownership interests at long-term negotiated prices approximating cost. IMFS also sold product to us and Intel generally in proportion to our ownership interests at long-term negotiated prices approximating cost. Due to changes in the ownership interest of IMFS, our share of its output grew from 57% at the beginning of the first quarter of 2012 to 78% in the second quarter of 2012. As a result of our acquisition of Intel's remaining interest in IMFS and other IM Flash restructuring agreements with Intel, Intel has not had rights to the output from either IMFS or our Virginia facility since the third quarter of 2012. Subsequent to the third quarter of 2012, we also sell NAND Flash products to Intel under a cost-plus supply arrangement.

Aggregate NAND Flash sales to Intel were $148 million and $261 million for the first quarters of 2013 and 2012, respectively. Receivables from Intel for sales of NAND Flash products as of November 29, 2012 and August 30, 2012 were $87 million and $103 million, respectively.


24



IM Flash distributions and contributions: The following table presents IM Flash's distributions to and contributions from its shareholders ("IM Flash" includes both IMFT and IMFS for the first quarter of 2012 and includes only IMFT for the first quarter of 2013):

Quarter ended
 
November 29,
2012
 
December 1,
2011
IM Flash distributions to Micron
 
$

 
$
86

IM Flash distributions to Intel
 

 
83

Micron contributions to IM Flash
 

 
103

Intel contributions to IM Flash
 

 
131


MP Mask

In 2006, we formed a joint venture with Photronics to produce photomasks for leading-edge and advanced next generation semiconductors.  At inception and through November 29, 2012, we owned 50.01% and Photronics owned 49.99% of MP Mask.  We contributed $8 million to MP Mask and Photronics contributed $7 million to MP Mask in the first quarter of 2012. In connection with the formation of the joint venture, we received $72 million in 2006 in exchange for entering into a license agreement with Photronics, which is being recognized over the term of the 10-year agreement.  Deferred income and other noncurrent liabilities included an aggregate of $25 million and $26 million as of November 29, 2012 and August 30, 2012, respectively, related to this agreement. We purchase a substantial majority of the reticles produced by MP Mask pursuant to a supply arrangement.

The following table presents the assets and liabilities of MP Mask included in our consolidated balance sheets, excluding intercompany balances:

As of
 
November 29,
2012
 
August 30, 2012
Current assets
 
$
21

 
$
19

Noncurrent assets (primarily property, plant and equipment)
 
168

 
170

Current liabilities
 
12

 
12


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


Segment Information

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

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

Our other operations do not meet the quantitative thresholds of a reportable segment and are reported under All Other.

Certain operating expenses directly associated with the activities of a specific reportable segment are charged to that segment. Other indirect operating expenses (income) are generally allocated to the reportable segments based on their respective percentage of total net sales, cost of goods sold or forecasted wafer production. We do not allocate the unrealized gains or losses from changes in fair values of our Elpida or Rexchip hedges to our segments.

25




We do not identify or report internally our assets or capital expenditures by segment, nor do we allocate gains and losses from equity method investments, interest, other non-operating income or expense items or taxes to operating segments.  There are no differences in the accounting policies for segment reporting and our consolidated results of operations.

Quarter ended
 
November 29,
2012
 
December 1,
2011
Net sales:
 
 
 
 
NSG
 
$
617

 
$
683

DSG
 
600

 
656

ESG
 
278

 
262

WSG
 
263

 
373

All Other
 
76

 
116

 
 
$
1,834

 
$
2,090

 
 
 
 
 
Operating income (loss):
 
 
 
 

NSG
 
$
12

 
$
94

DSG
 
(112
)
 
(139
)
ESG
 
78

 
38

WSG
 
(64
)
 
(58
)
All Other
 
(13
)
 
(17
)
Unallocated
 
(58
)
 

 
 
$
(157
)
 
$
(82
)



26



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, "we," "our," "us" and similar terms include Micron Technology, Inc. and its subsidiaries, unless the context indicates otherwise. The following discussion 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 in "Overview" regarding timing of the closing of the Elpida transactions and expectations related to Elpida's future cash flows; in "Operating Results by Product" regarding our share of future output from Inotera and potential changes to our agreements with Nanya and Inotera; in "Selling, General and Administrative" regarding SG&A costs for the second quarter of 2013; in "Research and Development" regarding R&D costs for the second quarter of 2013; and in "Liquidity and Capital Resources" regarding the sufficiency of our cash and investments, cash flows from operations and available financing to meet our requirements at least through 2013 and regarding our pursuit of additional financing, capital spending in 2013, the timing of payments for certain contractual obligations and the timing of payments in connection with the Elpida transactions. 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 "Item 1A. Risk Factors." This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended August 30, 2012. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31 and fiscal 2013 and 2012 each contained 52 weeks. All production data includes the production of our consolidated joint ventures and our other partnering arrangements. All tabular dollar amounts are in millions.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:

Overview:  An overview of our business and operations and highlights of key transactions and events.
Results of Operations:  An analysis of our financial results consisting of the following:
Consolidated results;
Operating results by business segment;
Operating results by product; and
Operating expenses and other.
Liquidity and Capital Resources:  An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and potential sources of liquidity.


Overview

We are a global manufacturer and marketer of semiconductor devices, principally NAND Flash, DRAM and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. In addition, we manufacture semiconductor components for CMOS image sensors and other semiconductor products. We market our products through our internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers ("OEMs") and retailers located around the world. Our success is largely dependent on the market acceptance of our diversified portfolio of semiconductor products, efficient utilization of our manufacturing infrastructure, successful ongoing development of advanced process technologies and the return on research and development ("R&D") investments.

We obtain products from three primary sources: (1) production from our wholly-owned manufacturing facilities, (2) production from our joint venture manufacturing facilities, and (3) to a lesser degree, from third party manufacturers. In recent years, we have increased our manufacturing scale and product diversity through strategic acquisitions and various partnering arrangements, including joint ventures, which have helped us to attain lower costs than we could otherwise achieve through internal investments alone.


27



We make significant investments to develop the proprietary product and process technologies that are implemented in our worldwide manufacturing facilities and through our joint ventures. These investments enable our production of semiconductor products with increasing functionality and performance at lower costs. We generally reduce the manufacturing cost of each generation of product through advancements in product and process technology such as our leading-edge line-width process technology and innovative array architecture. We continue to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption, improved read/write reliability and increased memory density. To leverage our significant investments in R&D, we have formed, and may continue to form, strategic joint ventures that allow us to share the costs of developing memory product and process technologies with joint venture partners. In addition, from time to time, we also sell and/or license technology to other parties. We continue to pursue additional opportunities to monetize our investment in intellectual property through partnering and other arrangements.

We have the following four reportable segments:

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

Our other operations do not meet the quantitative thresholds of a reportable segment and are reported under All Other.

Elpida Memory, Inc.

Elpida Sponsor Agreement

On July 2, 2012, we entered into a sponsor agreement (the "Sponsor Agreement") with the trustees of Elpida Memory, Inc. ("Elpida") and its subsidiary, Akita Elpida Memory, Inc. ("Akita" and, together with Elpida, the "Elpida Companies"). The Elpida Companies filed petitions for corporate reorganization proceedings with the Tokyo District Court (the "Court") under the Corporate Reorganization Act of Japan on February 27, 2012.

Under the Sponsor Agreement, we committed to support plans of reorganization for the Elpida Companies that would provide for payments to the secured and unsecured creditors of the Elpida Companies in an aggregate amount of 200 billion yen (or $2.44 billion, assuming approximately 82 yen per U.S. dollar, the exchange rate as of November 29, 2012), less certain expenses of the reorganization proceedings and certain other items. As a condition of the Sponsor Agreement, we deposited 1.8 billion yen (or $22 million) into an escrow account in July 2012 which will be applied to the share acquisition payments at closing. Of the aggregate amount, we will fund 60 billion yen (or $731 million) through a cash payment to Elpida at the closing, in exchange for 100% ownership of Elpida's equity. The remaining 140 billion yen (or $1.71 billion) of payments will be made by the Elpida Companies (using cash flows expected to be generated from our payment for foundry services provided by Elpida, as our subsidiary) in six annual installments payable at the end of each calendar year beginning in 2014, with payments of 20 billion yen (or $244 million) in each of 2014 through 2017, and payments of 30 billion yen (or $365 million) in each of 2018 and 2019.


28



We have agreed to provide additional financial support to Elpida, subject to certain conditions, which may include a payment guarantee under certain circumstances, to facilitate its continued access to working capital financing of up to 16 billion yen (or $195 million) from third-party finance sources through the closing of the Elpida share purchase, and to use reasonable efforts to assist Elpida in obtaining up to 5 billion yen (or $61 million) of continued working capital financing from third parties for up to two months following the closing. In addition, subject to certain conditions, we have agreed to use reasonable efforts to assist the Elpida Companies in financing up to 64 billion yen (or $780 million) of eligible capital expenditures incurred through June 30, 2014, including up to 40 billion yen (or $487 million) incurred prior to June 30, 2013, either by providing payment guarantees under certain circumstances, or by providing such financing directly. Failure to close the transaction would not relieve us of our obligations under any guarantees to third party financing sources entered into in connection with any such financing arrangements. As of November 29, 2012, we had provided a payment guarantee related to financing of capital expenditures of 29 million euros (or $38 million). In December 2012, we provided an additional payment guarantee related to financing of capital expenditures of 6 billion yen (or $73 million). Our obligations under these guarantee arrangements are collateralized by rights to certain equipment and other assets of Elpida.

Under applicable Japanese law, following the closing of the transaction, because a portion of the payments to creditors will be satisfied through the installment payments described above, the operation of the businesses of the Elpida Companies will remain subject to the oversight of the Court in charge of the reorganization proceedings and of the trustees (including a trustee nominated by us upon the closing of the transaction).

The Sponsor Agreement contains certain termination rights, including our right to terminate the Sponsor Agreement if a change, taken together with all other changes, occurs that is or would reasonably be expected to be materially adverse to (i) the business, assets, etc. of Elpida and its subsidiaries, taken as a whole, or to the business, assets, etc. taken as a whole of Rexchip Electronics Corporation ("Rexchip"), a Taiwanese corporation formed as a manufacturing joint venture by Elpida and Powerchip Technology Corporation ("Powerchip"), a Taiwanese corporation; or (ii) our ability to operate Elpida's business immediately following closing in substantially the same manner as conducted by Elpida as of July 2, 2012.  Elpida currently owns, directly and indirectly through a subsidiary, approximately 65% of Rexchip's outstanding common stock.

The trustees of the Elpida Companies submitted plans of reorganization to the Court on August 21, 2012, which plans are subject to court and creditor approval under applicable Japanese law.  The Sponsor Agreement provides that the plans of reorganization submitted by the trustees are to contain terms consistent with the provisions of the Sponsor Agreement. Certain creditors of Elpida have challenged the proposed plan of reorganization submitted by the trustees and proposed an alternative plan of reorganization. On October 31, 2012, the Court approved submission of the plans of reorganization as submitted by the trustees of the Elpida Companies to creditors for approval. The Court also issued an order that the alternative plan of reorganization proposed by certain creditors of Elpida not be submitted to a creditor vote. The deadline for creditors to vote on the plans of reorganization is February 26, 2013.

The consummation of the Sponsor Agreement is subject to various closing conditions, including but not limited to approval by the Court, requisite creditor approval, receipt of approvals in bankruptcy proceedings in other jurisdictions and receipt of regulatory approvals in other countries, including the People's Republic of China. The transaction is currently anticipated to close in the first half of calendar 2013.

Rexchip Share Purchase Agreement

On July 2, 2012, we entered into a share purchase agreement with Powerchip and certain of its affiliates (the "Rexchip Share Purchase Agreement"), under which we will purchase approximately 714 million shares of Rexchip common stock, which represents approximately 24% of Rexchip's outstanding common stock, for approximately 10 billion New Taiwan dollars (or $343 million, assuming approximately 29 New Taiwan dollars per U.S. dollar, the exchange rate as of November 29, 2012). The consummation of the Rexchip Share Purchase Agreement is subject to various closing conditions, including the closing of the transactions contemplated by the Sponsor Agreement. At the closing of the Sponsor Agreement and the Rexchip Share Purchase Agreement, our aggregate beneficial ownership interest in Rexchip will approximate 89%.


29



Currency Hedging

Elpida Hedges: On July 2, 2012, we executed a series of separate currency exchange transactions pursuant to which we purchased call options to buy 200 billion yen with a weighted-average strike price of 79.15 (yen per U.S. dollar). In addition, to reduce the cost of these call options, we sold put options to sell 100 billion yen with a strike price of 83.32 and we sold call options to buy 100 billion yen with a strike price of 75.57. The net cost of these call and put options, which expire on April 3, 2013, of $49 million is payable upon settlement. These currency options mitigate the risk of a strengthening yen for our yen-denominated payments under the Sponsor Agreement while preserving some ability for us to benefit if the value of the yen weakens relative to the U.S. dollar.   These option contracts were not designated for hedge accounting and are remeasured at fair value each period with gains and losses reflected in our results of operations.

As a result of the weaker yen since the inception of the hedge on July 2, 2012, the U.S. dollar equivalent of the 200 billion yen to be paid to the secured and unsecured creditors of the Elpida Companies decreased by $70 million as of November 29, 2012. As a result of the mark-to-market adjustments of the hedge, we recorded in other operating (income) expense $62 million of losses in the first quarter of 2013 and $9 million of gains in the fourth quarter of 2012 (cumulative losses since inception of $53 million).

Rexchip Hedges: On July 25, 2012, we executed a series of separate currency exchange transactions pursuant to which we purchased call options to buy 10 billion New Taiwan dollars with a weighted-average strike price of 29.21 (New Taiwan dollar per U.S. dollar). The cost of these options, which expire on April 2, 2013, of $3 million is payable upon settlement. These currency options mitigate the risk of a strengthening New Taiwan dollar for our payments under the Rexchip Share Purchase Agreement.  These option contracts were not designated for hedge accounting and are remeasured at fair value each period with gains and losses reflected in our results of operations.


Results of Operations

Consolidated Results

 
 
First Quarter
 
Fourth Quarter

 
2013
 
% of net sales
 
2012
 
% of net sales
 
2012
 
% of net sales
Net sales
 
$
1,834

 
100
 %
 
$
2,090

 
100
 %
 
$
1,963

 
100
 %
Cost of goods sold
 
1,617

 
88
 %
 
1,785

 
85
 %
 
1,744

 
89
 %
Gross margin
 
217

 
12
 %