Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 07/06/2016 14:05:29)


 
 
 
 
 
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 June 2, 2016

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 June 30, 2016, was 1,038,390,543 .

 
 
 
 
 




Definitions of Commonly Used Terms

As used herein, "we," "our," "us," and similar terms include Micron Technology, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. Abbreviations, terms, or acronyms are commonly used or found in multiple locations throughout this report and include the following:

Term
 
Definition
 
Term
 
Definition
2021 Notes
 
2.00% Convertible Senior Notes due 2021
 
MCP
 
Multi-Chip Package
2022 Term Loan B
 
Senior Secured Term Loan B due 2022
 
Micron
 
Micron Technology, Inc. (Parent Company)
2023 Secured Notes
 
7.500% Senior Secured Notes due 2023
 
MLC
 
Multi-Level Cell
2031B Notes
 
1.875% Convertible Senior Notes due 2031
 
MMJ
 
Micron Memory Japan, Inc.
2032 Notes
 
2032C and 2032D Notes
 
MMJ Companies
 
MAI and MMJ
2032C Notes
 
2.375% Convertible Senior Notes due 2032
 
MMJ Group
 
MMJ and its subsidiaries
2032D Notes
 
3.125% Convertible Senior Notes due 2032
 
MMT
 
Micron Memory Taiwan Co., Ltd.
2033 Notes
 
2033E and 2033F Notes
 
MP Mask
 
MP Mask Technology Center, LLC
2033E Notes
 
1.625% Convertible Senior Notes due 2033
 
Nanya
 
Nanya Technology Corporation
2033F Notes
 
2.125% Convertible Senior Notes due 2033
 
Photronics
 
Photronics, Inc.
2043G Notes
 
3.00% Convertible Senior Notes due 2043
 
Qimonda
 
Qimonda AG
Elpida
 
Elpida Memory, Inc.
 
R&D
 
Research and Development
IMFT
 
IM Flash Technologies, LLC
 
SG&A
 
Selling, General and Administration
Inotera
 
Inotera Memories, Inc.
 
SSD
 
Solid-State Drive
Intel
 
Intel Corporation
 
Tera Probe
 
Tera Probe, Inc.
Japan Court
 
Tokyo District Court
 
TLC
 
Triple-Level Cell
MAI
 
Micron Akita, Inc.
 
VIE
 
Variable Interest Entity


Additional Information

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





PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

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

 
 
Quarter ended
 
Nine months ended
 
 
June 2,
2016
 
June 4,
2015
 
June 2,
2016
 
June 4,
2015
Net sales
 
$
2,898

 
$
3,853

 
$
9,182

 
$
12,592

Cost of goods sold
 
2,400

 
2,651

 
7,256

 
8,347

Gross margin
 
498

 
1,202

 
1,926

 
4,245

 
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
148

 
169

 
502

 
549

Research and development
 
382

 
406

 
1,206

 
1,161

Other operating (income) expense, net
 
(5
)
 
(4
)
 
18

 
(36
)
Operating income (loss)
 
(27
)
 
631

 
200

 
2,571

 
 
 
 
 
 
 
 
 
Interest income
 
10

 
9

 
33

 
24

Interest expense
 
(109
)
 
(97
)
 
(302
)
 
(270
)
Other non-operating income (expense), net
 
(34
)
 
(16
)
 
(44
)
 
(71
)
 
 
(160
)
 
527

 
(113
)
 
2,254

 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
(15
)
 
(104
)
 
(16
)
 
(226
)
Equity in net income (loss) of equity method investees
 
(40
)
 
68

 
24

 
400

Net income (loss)
 
(215
)
 
491

 
(105
)
 
2,428

 
 
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests
 

 

 
(1
)
 

Net income (loss) attributable to Micron
 
$
(215
)
 
$
491

 
$
(106
)
 
$
2,428

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 
 
 
Basic
 
$
(0.21
)
 
$
0.46

 
$
(0.10
)
 
$
2.26

Diluted
 
(0.21
)
 
0.42

 
(0.10
)
 
2.05

 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
1,036

 
1,073

 
1,035

 
1,072

Diluted
 
1,036

 
1,170

 
1,035

 
1,185











See accompanying notes to consolidated financial statements.

1



MICRON TECHNOLOGY, INC.

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

 
 
Quarter ended
 
Nine months ended
 
 
June 2,
2016
 
June 4,
2015
 
June 2,
2016
 
June 4,
2015
Net income (loss)
 
$
(215
)
 
$
491

 
$
(105
)
 
$
2,428

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
39

 
17

 
(50
)
 
(57
)
Gain (loss) on investments, net
 
4

 
(2
)
 
2

 
(3
)
Gain (loss) on derivatives, net
 
3

 
(1
)
 
2

 
(19
)
Pension liability adjustments
 

 
1

 
(5
)
 
19

Other comprehensive income (loss)
 
46

 
15

 
(51
)
 
(60
)
Total comprehensive income (loss)
 
(169
)
 
506

 
(156
)
 
2,368

Comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(1
)
 
1

Comprehensive income (loss) attributable to Micron
 
$
(169
)
 
$
506

 
$
(157
)
 
$
2,369



































See accompanying notes to consolidated financial statements.

2



MICRON TECHNOLOGY, INC.

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

As of
 
June 2,
2016
 
September 3,
2015
Assets
 
 
 
 
Cash and equivalents
 
$
4,627

 
$
2,287

Short-term investments
 
354

 
1,234

Receivables
 
2,073

 
2,507

Inventories
 
2,920

 
2,340

Other current assets
 
136

 
228

Total current assets
 
10,110

 
8,596

Long-term marketable investments
 
671

 
2,113

Property, plant, and equipment, net
 
13,209

 
10,554

Equity method investments
 
1,361

 
1,379

Intangible assets, net
 
491

 
449

Deferred tax assets
 
631

 
597

Other noncurrent assets
 
528

 
455

Total assets
 
$
27,001

 
$
24,143

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
3,599

 
$
2,611

Deferred income
 
189

 
205

Current debt
 
712

 
1,089

Total current liabilities
 
4,500

 
3,905

Long-term debt
 
8,919

 
6,252

Other noncurrent liabilities
 
548

 
698

Total liabilities
 
13,967

 
10,855

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 

 
49

 
 
 
 
 
Micron shareholders' equity
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized; 1,091 shares issued and outstanding (1,084 as of September 3, 2015)
 
109

 
108

Additional capital
 
7,675

 
7,474

Retained earnings
 
5,470

 
5,588

Treasury stock, 54 shares held (45 as of September 3, 2015)
 
(1,029
)
 
(881
)
Accumulated other comprehensive income (loss)
 
(38
)
 
13

Total Micron shareholders' equity
 
12,187

 
12,302

Noncontrolling interests in subsidiaries
 
847

 
937

Total equity
 
13,034

 
13,239

Total liabilities and equity
 
$
27,001

 
$
24,143





See accompanying notes to consolidated financial statements.

3



MICRON TECHNOLOGY, INC.

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

Nine months ended
 
June 2,
2016
 
June 4,
2015
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
(105
)
 
$
2,428

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

 
 

Depreciation expense and amortization of intangible assets
 
2,266

 
1,957

Amortization of debt discount and other costs
 
94

 
105

Stock-based compensation
 
148

 
127

Loss on restructure of debt
 
4

 
48

Equity in net income of equity method investees
 
(24
)
 
(400
)
Change in operating assets and liabilities
 
 

 
 

Receivables
 
468

 
337

Inventories
 
(580
)
 
75

Accounts payable and accrued expenses
 
3

 
(533
)
Deferred income taxes, net
 
11

 
248

Other
 
(13
)
 
(214
)
Net cash provided by operating activities
 
2,272

 
4,178

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant, and equipment
 
(3,894
)
 
(2,256
)
Purchases of available-for-sale securities
 
(879
)
 
(3,809
)
Payments to settle hedging activities
 
(107
)
 
(94
)
Proceeds from sales and maturities of available-for-sale securities
 
3,189

 
1,386

Proceeds from settlement of hedging activities
 
190

 
10

Other
 
(141
)
 
41

Net cash provided by (used for) investing activities
 
(1,642
)
 
(4,722
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of debt
 
2,166

 
2,172

Proceeds from equipment sale-leaseback transactions
 
538

 
291

Contributions from noncontrolling interests
 
37

 
102

Proceeds from issuance of stock under equity plans
 
30

 
64

Repayments of debt
 
(689
)
 
(2,051
)
Cash paid to acquire treasury stock
 
(147
)
 
(245
)
Acquisition of noncontrolling interests
 
(93
)
 

Other
 
(139
)
 
(118
)
Net cash provided by (used for) financing activities
 
1,703

 
215

 
 
 
 
 
Effect of changes in currency exchange rates on cash and equivalents
 
7

 
(127
)
 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
2,340

 
(456
)
Cash and equivalents at beginning of period
 
2,287

 
4,150

Cash and equivalents at end of period
 
$
4,627

 
$
3,694





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

We are a global leader in advanced semiconductor systems. Our broad portfolio of high-performance memory technologies, including DRAM, NAND Flash, and NOR Flash, is the basis for solid-state drives, modules, multi-chip packages, and other system solutions. Our memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded, and automotive applications. The accompanying consolidated financial statements include the accounts of Micron and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended September 3, 2015 . In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal year 2016 contains 52 weeks and fiscal year 2015 contained 53 weeks. The first quarter of 53-week years contains 14 weeks. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 3, 2015 .


Variable Interest Entities

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

Unconsolidated VIEs

Inotera : Inotera is a VIE because of the terms of its supply agreement with us. 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 limitations on our governance rights that require the consent of other parties for key operating decisions and due to Inotera's dependence on Nanya for financing and the ability of Inotera to operate in Taiwan. Therefore, we do not consolidate Inotera and we account for our interest under the equity method. (See "Equity Method Investments – Inotera" note.)

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

SC Hiroshima Energy Corporation : SC Hiroshima Energy Corporation ("SCHE") is an entity created to construct and operate a cogeneration, electrical power plant to support our wafer manufacturing facility in Hiroshima, Japan. We do not have an equity interest in SCHE. SCHE is a VIE due to the nature of its tolling agreements with us and our option to purchase SCHE's assets. We do not control the operation and maintenance of the plant, which we have determined are the activities of SCHE that most significantly impact its economic performance. Therefore, we do not consolidate SCHE.

5




PTI Xi'an : Powertech Technology Inc. Xi'an ("PTI Xi'an") is a wholly-owned subsidiary of Powertech Technology Inc. ("PTI") and was created to provide assembly services to us at our manufacturing site in Xi'an, China. We do not have an equity interest in PTI Xi'an. PTI Xi'an is a VIE because of the terms of its service agreement with us and its dependency on PTI to finance its operations. We have determined that we do not have the power to direct the activities of PTI Xi'an that most significantly impact its economic performance, primarily because we have no governance rights. Therefore, we do not consolidate PTI Xi'an.

Consolidated VIEs

IMFT : IMFT is a VIE because all of its costs are passed to us and its other member, Intel, through product purchase agreements and because IMFT is dependent upon us or Intel for additional cash requirements.  The primary activities of IMFT are driven by the constant introduction of product and process technology. Because we perform a significant majority of the technology development, we have the power to direct its key activities.  In addition, IMFT manufactures certain products exclusively for us using our technology. We consolidate IMFT because we have the power to direct the activities of IMFT that most significantly impact its economic performance and because we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it.

MP Mask : On May 5, 2016, we acquired all of the remaining interest of MP Mask from its other member, Photronics. Prior to May 5, 2016, we consolidated MP Mask because we had the power to direct the activities of MP Mask that most significantly impacted its economic performance and because we had the obligation to absorb losses and the right to receive benefits from MP Mask that could potentially have been significant to it.

(See "Equity – Noncontrolling Interests in Subsidiaries" note.)


Recently Adopted Accounting Standards

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17 – Balance Sheet Classification of Deferred Taxes, which eliminated the requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. We adopted this ASU as of the beginning of our second quarter of 2016 on a prospective basis and did not retrospectively adjust prior periods. As a result of adopting this standard, we presented our deferred tax assets and liabilities as noncurrent. The adoption of this standard did not have a material impact on our financial statements.

In September 2015, the FASB issued ASU 2015-16 – Simplifying the Accounting for Measurement-Period Adjustments, which eliminated the requirement to restate prior period financial statements for measurement period adjustments following a business combination. Instead, the cumulative impact of measurement period adjustments, including the impact on prior periods, is required to be recognized in the reporting period in which the adjustment is identified. We adopted this ASU in our second quarter of 2016 on a prospective basis. The adoption of this standard did not have a material impact on our financial statements.


Recently Issued Accounting Standards

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

In January 2016, the FASB issued ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities , which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities.  This ASU will be effective for us beginning in our first quarter of 2019 and requires modified-retrospective adoption.  We are evaluating the effects of the adoption of this ASU on our financial statements.


6



In April 2015, the FASB issued ASU 2015-05 – Customer's Accounting for Fees Paid in a Cloud Computing Arrangement , which provides additional guidance to customers about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10 Leases, to determine the asset acquired in a software licensing arrangement. This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted.  This ASU allows for either prospective or retrospective adoption. We are evaluating the timing and method of our adoption and the effects of the adoption of this ASU on our financial statements.

In February 2015, the FASB issued ASU 2015-02 – Amendments to the Consolidation Analysis , which amends the consolidation requirements in Accounting Standards Codification 810 Consolidation .  ASU 2015-02 makes targeted amendments to the consolidation guidance for VIEs, which could change consolidation conclusions.  This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted.  This ASU allows for either retrospective or modified-retrospective adoption. We are evaluating the timing and method of our adoption and the effects of the adoption of this ASU on our financial statements.

In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers , which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the U.S.  The core principal of this ASU, as amended, is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  We are required to adopt this ASU beginning in our first quarter of 2019; however, we are permitted to adopt this ASU as early as our first quarter of 2018. This ASU allows for either full-retrospective or modified-retrospective adoption. We are evaluating the timing and method of our adoption and the effects of the adoption of this ASU on our financial statements.


Proposed Acquisition of Inotera

In the second quarter of 2016, we entered into agreements to acquire the remaining interest in Inotera for 30 New Taiwan dollars per share in cash (equivalent to approximately $0.92 per share, assuming 32.6 New Taiwan dollars per U.S. dollar, the exchange rate as of June 2, 2016 ). As of June 2, 2016 , we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a 32% ownership interest, and the remaining ownership interest in Inotera was publicly held. Based on the exchange rate as of June 2, 2016 , we estimate the aggregate consideration payable for the 67% of Inotera shares not owned by us would be approximately $4.1 billion . We anticipate financing the acquisition with a combination of proceeds from the 80 billion New Taiwan dollar debt financing described below, a combination of issuance of Micron Shares and convertible notes to Nanya described below, additional borrowings under our existing credit agreement, and cash on hand.

On March 29, 2016, the transaction was approved by the shareholders of Inotera, including Nanya and certain of Nanya's affiliates (which approval was provided pursuant to voting and support agreements). Under the voting and support agreements, the parties have further agreed not to transfer any of their Inotera shares so long as the voting and support agreements are in effect. These agreements will terminate automatically upon the termination of the agreement to purchase the Inotera shares.

Consummation of the acquisition of Inotera is subject to various conditions, including but not limited to:

the receipt of necessary regulatory approvals from authorities in Taiwan, which have been received;
the consummation and funding of debt financing of at least 80 billion New Taiwan dollars (equivalent to $2.5 billion , assuming 32.6 New Taiwan dollars per U.S. dollar), on terms that are satisfactory to us; and
unless we determine otherwise, the consummation and funding of the Private Placement (described below).

In addition, the agreement to acquire the Inotera shares contains certain termination rights, including but not limited to termination by either us or Inotera if we have not completed the purchase of the remaining shares of Inotera by November 30, 2016.


7



The date for the closing of the Inotera transaction is not determinable at this time. Consummation of the Inotera transaction is subject to significant uncertainties and there can be no assurance that the Inotera transaction will be consummated.

Issuance of Micron Shares and Convertible Notes to Nanya

In the second and third quarters of 2016, we entered into agreements with Nanya pursuant to which we have the option to issue a combination of shares of our common stock (the "Micron Shares") and 2.00% convertible senior notes due 2021 (the "2021 Convertible Notes") to Nanya, which is subject to regulatory approvals and various other conditions. The issuance of the Micron Shares or the 2021 Convertible Notes is subject to the consummation of the Inotera acquisition and the proceeds would be used to fund a portion of the consideration payable in the Inotera acquisition.

Micron Shares : We have the option to issue Micron Shares in an amount equivalent to up to 31.5 billion New Taiwan dollars (equivalent to $964 million , assuming 32.6 New Taiwan dollars per U.S. dollar) (the "Private Placement"), which would be used to fund a portion of the consideration for the transaction. The per-share selling price for the Micron Shares would be equal to the greater of the New Taiwan dollar equivalent of (i) the average of the closing sale price of our common stock during the 30 consecutive trading day period ending on and including the 30 th trading day prior to the consummation of the Inotera acquisition or (ii) $10.00 .

2021 Convertible Notes : We have the option to issue up to 12.6 billion New Taiwan dollars (equivalent to $386 million , assuming 32.6 New Taiwan dollars per U.S. dollar) in lieu of a corresponding value of Micron Shares so long as we also issue Micron Shares to Nanya of at least 6.3 billion New Taiwan dollars (equivalent to $193 million ) pursuant to the Private Placement.


Technology Transfer and License Agreements with Nanya

In the second quarter of 2016, we entered into technology transfer and license agreements pursuant to which Nanya has the option to require us to transfer to Nanya certain technology and deliverables related to the next DRAM process node generation (the "1X Process Node") after our 20nm process node and the next DRAM process node generation after the 1X Process Node for Nanya's use. Under the terms of the agreements, Nanya would pay royalties to us for a license to the transferred technology based on revenues from products implementing the technology, subject to an agreed cap, and we would also receive an equity interest in Nanya upon the achievement of certain milestones. Nanya's option becomes exercisable upon the closing of the Inotera acquisition transaction.

8




Cash and Investments

Cash and equivalents and the fair values of available-for-sale investments, which approximated amortized costs, were as follows:

As of
 
June 2, 2016
 
September 3, 2015
 
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (3)
 
Total Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (3)
 
Total Fair Value
Cash
 
$
2,067

 
$

 
$

 
$
2,067

 
$
1,684

 
$

 
$

 
$
1,684

Level 1 (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
2,255

 

 

 
2,255

 
168

 

 

 
168

Level 2 (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
245

 
393

 
638

 
2

 
616

 
1,261

 
1,879

Certificates of deposit
 
298

 
6

 
3

 
307

 
311

 
28

 
23

 
362

Asset-backed securities
 

 
5

 
186

 
191

 

 
8

 
575

 
583

Government securities
 
5

 
88

 
89

 
182

 
58

 
391

 
254

 
703

Commercial paper
 
2

 
10

 

 
12

 
64

 
191

 

 
255

 
 
$
4,627

 
$
354

 
$
671

 
$
5,652

 
$
2,287

 
$
1,234

 
$
2,113

 
$
5,634

(1)  
The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(2)  
The fair value of Level 2 securities is measured using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analysis to validate information obtained from these pricing services. No adjustments were made to such pricing information as of June 2, 2016 .
(3)  
The maturities of long-term marketable investments range from one to four years.

Proceeds from sales of available-for-sale securities were $902 million and $1.89 billion for the third quarter and first nine months of 2016 , respectively, and $562 million and $938 million for the third quarter and first nine months of 2015 , respectively. Gross realized gains and losses from sales of available-for-sale securities were not significant for any period presented. As of June 2, 2016 , there were no available-for-sale securities that had been in a loss position for longer than 12 months.


Receivables

As of
 
June 2,
2016
 
September 3,
2015
Trade receivables
 
$
1,752

 
$
2,188

Income and other taxes
 
130

 
116

Other
 
191

 
203

 
 
$
2,073

 
$
2,507


As of June 2, 2016 and September 3, 2015 , other receivables included $70 million and $120 million , respectively, due from Intel for amounts related to product design and process development activities under cost-sharing agreements for NAND Flash memory and 3D XPoint TM memory.  (See "Equity – Noncontrolling Interests in Subsidiaries – IMFT" note.)

9




Inventories

As of
 
June 2,
2016
 
September 3,
2015
Finished goods
 
$
857

 
$
785

Work in process
 
1,813

 
1,315

Raw materials and supplies
 
250

 
240

 
 
$
2,920

 
$
2,340



Property, Plant, and Equipment

 
 
September 3,
2015
 
Additions
 
Retirements and Other
 
June 2,
2016
Land
 
$
88

 
$

 
$

 
$
88

Buildings
 
5,358

 
928

 
(25
)
 
6,261

Equipment (1)
 
21,020

 
3,732

 
(499
)
 
24,253

Construction in progress (2)
 
436

 
208

 
(34
)
 
610

Software
 
373

 
30

 
(1
)
 
402

 
 
27,275

 
4,898

 
(559
)
 
31,614

Accumulated depreciation
 
(16,721
)
 
(2,176
)
 
492

 
(18,405
)
 
 
$
10,554

 
$
2,722

 
$
(67
)
 
$
13,209

(1)  
Included costs related to equipment not placed into service of $1.98 billion and $928 million as of June 2, 2016 and September 3, 2015 , respectively.
(2)  
Included building-related construction and tool installation costs for assets not placed into service.

Depreciation expense was $725 million and $2.18 billion for the third quarter and first nine months of 2016 , respectively, and $644 million and $1.87 billion for the third quarter and first nine months of 2015 , respectively.


Equity Method Investments

As of
 
June 2, 2016
 
September 3, 2015
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera (1)
 
$
1,321

 
33
%
 
$
1,332

 
33
%
Tera Probe
 
26

 
40
%
 
38

 
40
%
Other
 
14

 
Various

 
9

 
Various

 
 
$
1,361

 
 

 
$
1,379

 
 

(1) Entity is a variable interest entity.

As of June 2, 2016 , substantially all of our maximum exposure to loss from our VIEs that were not consolidated was the $1.32 billion carrying value of our investment in Inotera.  We may also incur losses in connection with our rights and obligations to purchase all of Inotera's wafer production capacity under our supply agreement with Inotera.


10



We recognize our share of earnings or losses from our equity method investees generally on a two-month lag.  Included in our share of earnings for the first nine months of 2015 was $55 million related to Inotera's full release of its valuation allowance against net deferred tax assets related to its net operating loss carryforward and the resulting tax provision in subsequent periods. Equity in net income (loss) of equity method investees, net of tax, included the following:

 
 
Quarter ended
 
Nine months ended
 
 
June 2,
2016
 
June 4,
2015
 
June 2,
2016
 
June 4,
2015
Inotera
 
$
(19
)
 
$
67

 
$
35

 
$
402

Tera Probe
 
(22
)
 
3

 
(16
)
 
(3
)
Other
 
1

 
(2
)
 
5

 
1

 
 
$
(40
)
 
$
68

 
$
24

 
$
400


Inotera

We have partnered with Nanya in Inotera, a Taiwan DRAM memory company, since 2009.  In the second quarter of 2016, we entered into agreements to acquire the remaining interest in Inotera. (See "Proposed Acquisition of Inotera" note.)

As of June 2, 2016 , the market value of our equity interest in Inotera was $1.93 billion based on the closing trading price of 29.35 New Taiwan dollars per share in an active market. As of June 2, 2016 and September 3, 2015 , there were losses of $41 million and gains of $13 million , respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.

From January 2013 through December 2015, we purchased all of Inotera's DRAM output under a supply agreement at prices reflecting discounts from market prices for our comparable components. Effective beginning on January 1, 2016, the price for DRAM products sold to us is based on a formula that equally shares margin between Inotera and us. We purchased $348 million and $1.05 billion of DRAM products from Inotera in the third quarter and first nine months of 2016, respectively, and $533 million and $1.89 billion in the third quarter and first nine months of 2015, respectively. The supply agreement with Inotera (as extended in December 2015) has an initial three-year term, followed by a three-year wind-down period. Upon termination of the initial three-year term, the share of Inotera's capacity we would purchase would decline over the wind-down period.

Tera Probe

In 2013, we acquired a 40% interest in Tera Probe, which provides semiconductor wafer testing and probe services to us and others. During the third quarter of 2016, we recorded an impairment charge of $25 million within equity in net income (loss) of equity method investees to write down the carrying value of our investment in Tera Probe to its fair value based on its trading price (Level 1 fair value measurement). As of June 2, 2016 , the difference between our investment balance and our proportionate share of underlying equity in Tera Probe was $43 million and is expected to be amortized over a weighted-average period of seven years. We incurred manufacturing costs for services performed by Tera Probe of $19 million and $58 million for the third quarter and first nine months of 2016, respectively, and $19 million and $66 million for the third quarter and first nine months of 2015, respectively.

11




Intangible Assets and Goodwill

As of
 
June 2, 2016
 
September 3, 2015
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortizing assets
 
 
 
 
 
 
 
 
Product and process technology
 
$
824

 
$
(442
)
 
$
864

 
$
(416
)
Other
 
1

 

 
2

 
(1
)
 
 
825

 
(442
)
 
866

 
(417
)
Non-amortizing assets
 
 
 
 
 
 
 
 
In-process R&D
 
108

 

 

 

 
 
 
 
 
 
 
 
 
 
 
$
933

 
$
(442
)
 
$
866

 
$
(417
)
 
 
 
 
 
 
 
 
 
Goodwill (1)
 
$
104

 
 
 
$
23

 
 
(1)  
Included in other noncurrent assets.

During the first nine months of 2016 and 2015 , we capitalized $24 million and $51 million , respectively, for product and process technology with weighted-average useful lives of 10 years and seven years, respectively. Amortization expense was $30 million and $90 million for the third quarter and first nine months of 2016 , respectively, and $29 million and $89 million for the third quarter and first nine months of 2015 , respectively.  The expected annual amortization expense for amortizing intangible assets held as of June 2, 2016 is $119 million for 2016 , $107 million for 2017 , $94 million for 2018 , $46 million for 2019 , and $28 million for 2020 .

In the first quarter of 2016, we acquired Tidal Systems, Ltd., a developer of PCIe NAND Flash storage controllers, to enhance our NAND Flash controller technology for $148 million . In connection therewith, we recognized $108 million of in-process R&D; $81 million of goodwill, which was derived from expected cost reductions and other synergies and was assigned to our Storage Business Unit; and $41 million of deferred tax liabilities; which, in aggregate, represented substantially all of the purchase price. The in-process R&D was valued using a replacement cost approach, which included inputs of reproduction cost, including developer's profit, and opportunity cost. We will begin amortizing the in-process R&D when development is complete, which is estimated to be in 2017, and will amortize it over its then estimated useful life. The goodwill is not expected to be deductible for tax purposes.


Accounts Payable and Accrued Expenses

As of
 
June 2,
2016
 
September 3,
2015
Accounts payable
 
$
1,105

 
$
1,020

Property, plant, and equipment payables
 
1,559

 
577

Salaries, wages, and benefits
 
292

 
321

Related party payables
 
258

 
338

Income and other taxes
 
50

 
85

Other
 
335

 
270

 
 
$
3,599

 
$
2,611


As of June 2, 2016 and September 3, 2015 , related party payables included $250 million and $327 million , respectively, due to Inotera primarily for the purchase of DRAM products. As of June 2, 2016 and September 3, 2015 , related party payables also included $7 million and $11 million , respectively, due to Tera Probe for probe services performed. (See "Equity Method Investments" note.)

12




Debt

 
 
 
 
 
 
June 2, 2016
 
September 3, 2015
Instrument (1)
 
Stated Rate
 
Effective Rate
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
MMJ creditor installment payments
 
N/A

 
6.25
%
 
$
175

 
$
632

 
$
807

 
$
161

 
$
701

 
$
862

Capital lease obligations (2)
 
N/A

 
N/A

 
347

 
816

 
1,163

 
326

 
466

 
792

1.258% notes
 
1.258
%
 
1.97
%
 
87

 
175

 
262

 
87

 
217

 
304

2022 senior notes
 
5.875
%
 
6.14
%
 

 
590

 
590

 

 
589

 
589

2022 senior secured term loan B
 
6.460
%
 
6.91
%
 
3

 
732

 
735

 

 

 

2023 senior notes
 
5.250
%
 
5.43
%
 

 
989

 
989

 

 
988

 
988

2023 senior secured notes
 
7.500
%
 
7.67
%
 

 
1,238

 
1,238

 

 

 

2024 senior notes
 
5.250
%
 
5.38
%
 

 
545

 
545

 

 
545

 
545

2025 senior notes
 
5.500
%
 
5.56
%
 

 
1,139

 
1,139

 

 
1,138

 
1,138

2026 senior notes
 
5.625
%
 
5.73
%
 

 
446

 
446

 

 
446

 
446

2032C convertible senior notes (3)
 
2.375
%
 
5.95
%
 

 
202

 
202

 

 
197

 
197

2032D convertible senior notes (3)
 
3.125
%
 
6.33
%
 

 
153

 
153

 

 
150

 
150

2033E convertible senior notes (3)
 
1.625
%
 
4.50
%
 

 
167

 
167

 
217

 

 
217

2033F convertible senior notes (3)
 
2.125
%
 
4.93
%
 

 
269

 
269

 
264

 

 
264

2043G convertible senior notes
 
3.000
%
 
6.76
%
 

 
654

 
654

 

 
644

 
644

Other notes payable
 
2.705
%
 
2.90
%
 
100

 
172

 
272

 
34

 
171

 
205

 
 
 
 
 
 
$
712

 
$
8,919

 
$
9,631

 
$
1,089

 
$
6,252

 
$
7,341

(1)  
We have either the obligation or the option to pay cash for the principal amount due upon conversion for all of our convertible notes. Since it is our current intent to settle in cash the principal amount of all of our convertible notes upon conversion, the dilutive effect of such notes on earnings per share is computed under the treasury stock method.
(2)  
Weighted-average imputed rate of 3.3% and 3.7% as of June 2, 2016 and September 3, 2015 , respectively.
(3)  
Since the closing price of our common stock for at least 20 trading days in the 30 trading day period ending on March 31, 2016 did not exceed 130% of the conversion price per share, these notes were not convertible by the holders after March 31, 2016. The 2033 Notes were classified as current as of September 3, 2015 because the terms of these notes require us to pay cash for the principal amount of any converted notes and holders of these notes had the right to convert their notes at that date.

2022 Senior Secured Term Loan B

On April 26, 2016, we entered into the 2022 Term Loan B and drew an aggregate principal amount of $750 million , which is due April 2022. The 2022 Term Loan B is collateralized by substantially all of the assets of Micron and Micron Semiconductor Products, Inc. ("MSP"), a subsidiary of Micron, subject to certain exceptions and permitted liens on such assets. The assets collateralizing the 2022 Term Loan B had an aggregate carrying value of $6.26 billion as of June 2, 2016 and also collateralize the 2023 Secured Notes (described below) on an equal and ratable basis, subject to certain limitations. Issuance costs for the 2022 Term Loan B totaled $16 million , which included an original issue discount of 1% of the initial aggregate principal amount.

The 2022 Term Loan B bears interest, at our election, of either (1) a base rate plus 5.00% , which base rate is defined as the greatest of (a) the prime rate, (b) the federal funds rate plus 0.50% , or (c) a one -month London Interbank Offered Rate ("LIBOR") plus 1.0% , or (2) an up to twelve -month LIBOR, subject to certain adjustments, plus 6.00% . We may, from time to time, elect to convert outstanding term loans from one rate to another. Principal payments are due quarterly beginning on September 30, 2016 in an amount equal to 0.25% of the initial aggregate principal amount with the balance due at maturity and may be prepaid without penalty. Interest is payable at least quarterly, but may be monthly if we elect a monthly LIBOR rate. We are also obligated to pay certain customary fees for a credit facility of this size and type.


13



The 2022 Term Loan B contains covenants that, among other things, limit, in certain circumstances, the ability of Micron and/or its domestic restricted subsidiaries, which are generally subsidiaries in the U.S. in which Micron owns at least 80% of the voting stock, to (1) create or incur certain liens and enter into sale-leaseback financing transactions; (2) in the case of domestic restricted subsidiaries, create, assume, incur, or guarantee additional indebtedness; and (3) in the case of Micron, consolidate or merge with or into, or sell, assign, convey, transfer, lease, or otherwise dispose of all or substantially all of its assets, to another entity. These covenants are subject to a number of limitations, exceptions, and qualifications.

Subsidiary Guarantee : The 2022 Term Loan B is guaranteed by MSP and substantially all of the assets of MSP are also collateral for the 2022 Term Loan B.

2023 Senior Secured Notes

On April 26, 2016, we issued $1.25 billion in principal amount of 2023 Secured Notes due September 2023. The 2023 Secured Notes are collateralized by substantially all of the assets of Micron and MSP, subject to certain exceptions and permitted liens on such assets, on an equal and ratable basis with the 2022 Term Loan B (described above), subject to certain exceptions. Issuance costs for the 2023 Secured Notes totaled $13 million .

The 2023 Secured Notes contain covenants that, among other things, limit, in certain circumstances, the ability of Micron and/or its domestic restricted subsidiaries to (1) create or incur certain liens and enter into sale-leaseback financing transactions; (2) in the case of domestic restricted subsidiaries, create, assume, incur, or guarantee additional indebtedness; and (3) in the case of Micron, consolidate or merge with or into, or sell, assign, convey, transfer, lease, or otherwise dispose of all or substantially all of its assets, to another entity. These covenants are subject to a number of limitations, exceptions, and qualifications.
 
Cash Redemption at Our Option : Prior to April 15, 2019, we may redeem the 2023 Secured Notes at a price equal to the principal amount thereof, plus a "make-whole" premium as described in the indenture governing the 2023 Secured Notes, together with accrued and unpaid interest. On or after April 15, 2019, we may redeem the 2023 Secured Notes, in whole or in part, at prices above the principal amount that decline over time, as specified in the indenture, together with accrued and unpaid interest. Additionally, prior to April 15, 2019, we may use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the 2023 Secured Notes at a price equal to 107.5% of the principal amount together with accrued and unpaid interest.
 
Subsidiary Guarantee : The 2023 Secured Notes are guaranteed by MSP and substantially all of the assets of MSP are also collateral for the 2023 Secured Notes.

Debt Restructure

During the first quarter of 2016, we repurchased $57 million in aggregate principal amount of our 2033E Notes, which had a carrying value of $54 million , for $94 million in cash. The liability and equity components of the repurchased notes had previously been stated separately within debt and equity in our consolidated balance sheet. As a result, our accounting for the repurchased notes decreased the carrying value of debt by $54 million and equity by $38 million .

Throughout 2015, we consummated a number of transactions to restructure our debt, including conversions, settlements and repurchases of convertible notes, the issuance of non-convertible senior notes, and the early repayment of a note. The following table presents the effect of each of the actions in the first nine months of 2015:

 
 
Increase (Decrease) in Principal
 
Increase (Decrease) in Carrying Value
 
Increase (Decrease) in Cash
 
(Decrease) in Equity
 
(Loss) (1)
Conversions and settlements
 
$
(121
)
 
$
(367
)
 
$
(408
)
 
$
(15
)
 
$
(22
)
Repurchases
 
(305
)
 
(261
)
 
(907
)
 
(624
)
 
(21
)
Issuance
 
2,000

 
1,979

 
1,979

 

 

Early repayment
 
(121
)
 
(115
)
 
(122
)
 

 
(5
)
 
 
$
1,453

 
$
1,236

 
$
542

 
$
(639
)
 
$
(48
)
(1)  
Included in other non-operating expense.


14



Conversions and Settlements : Holders of substantially all of our then remaining 2031B Notes with an aggregate principal amount of $114 million converted their notes in August 2014. As a result of our election to settle the conversion amounts entirely in cash, the settlement obligations became derivative debt liabilities, increasing the carrying value of the 2031B Notes by $275 million in 2014 before being settled in 2015 for an aggregate of $389 million in cash. Additionally, holders converted $7 million principal amount of our 2033E Notes and we settled the conversions in cash for $19 million in 2015.
Repurchases : Repurchased $305 million in aggregate principal amount of our 2032C and 2032D Notes.
Issuance : Issued $2.00 billion in aggregate principal amounts of 2023 senior notes, 2024 senior notes, and 2026 senior notes.

Capital Lease Obligations

In the third quarter of 2016, we recorded capital lease obligations aggregating $130 million , including $114 million related to equipment sale-leaseback transactions, at a weighted-average effective interest rate of 3.5% , with a weighted-average expected term of five years. In the first nine months of 2016, we recorded capital lease obligations aggregating $574 million , including $538 million related to equipment sale-leaseback transactions.

Convertible Senior Notes

As of June 2, 2016 , the trading price of our common stock was higher than the initial conversion prices of our 2032 Notes and our 2033 Notes. As a result, the conversion values were in excess of principal amounts for such notes. The following table summarizes our convertible notes outstanding as of June 2, 2016 :

 
 
Holder Put Date (1)
 
Outstanding Principal
 
Underlying Shares
 
Conversion Price Per Share
 
Conversion Price Per Share Threshold (2)
 
Conversion Value in Excess of Principal (3)
2032C Notes
 
May 2019
 
$
223

 
23

 
$
9.63

 
$
12.52

 
$
81

2032D Notes
 
May 2021
 
177

 
18

 
9.98

 
12.97

 
56

2033E Notes
 
February 2018
 
176

 
16

 
10.93

 
14.21

 
35

2033F Notes
 
February 2020
 
297

 
27

 
10.93

 
14.21

 
59

2043G Notes (4)
 
November 2028
 
1,025

 
35

 
29.16

 
37.91

 

 
 
 
 
$
1,898

 
119

 
 
 
 
 
$
231

(1)  
The terms of our convertible notes give holders the right to require us to repurchase all or a portion of their notes at a date prior to the contractual maturity at a price equal to the principal amount thereof plus accrued interest.
(2)  
Holders have the right to convert all or a portion of their notes at a date prior to the contractual maturity if, during any calendar quarter, the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price. The closing price of our common stock did not exceed the thresholds for the calendar quarter ended March 31, 2016; therefore, the notes were not convertible by the holders after March 31, 2016.
(3)  
Based on our closing share price of $13.11 as of June 2, 2016 .
(4)  
The original principal amount of $820 million accretes up to $917 million in November 2028 and $1.03 billion at maturity in 2043.

Other Facilities

In connection with entering into the 2022 Term Loan B, on April 25, 2016, we terminated our revolving credit facility that was entered into on December 2, 2014, and repaid the $50 million outstanding principal amount.

On December 1, 2015, we drew the remaining $174 million under our term loan agreement entered into on May 28, 2015. Amounts drawn are collateralized by certain property, plant, and equipment and are subject to a three -year loan with equal quarterly principal payments beginning December 2015 and accrue interest at a variable rate equal to the three -month LIBOR plus a margin not to exceed 2.2% . As of June 2, 2016 , the outstanding balance was $174 million .


15



Maturities of Notes Payable and Future Minimum Lease Payments

The following presents, as of June 2, 2016 , maturities of notes payable (including the MMJ Creditor Installment Payments) and future minimum lease payments under capital lease obligations.

 
 
Notes Payable
 
Capital Lease Obligations
Remainder of 2016
 
$
71

 
$
118

2017
 
376

 
334

2018
 
535

 
286

2019
 
547

 
242

2020
 
677

 
130

2021 and thereafter
 
6,815

 
151

Unamortized amounts and interest, respectively
 
(553
)
 
(98
)
 
 
$
8,468

 
$
1,163



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 applicable balance sheet dates, including those described below. We are currently a party to other legal actions arising from the normal course of business, none of which is expected to have a material adverse effect on our business, results of operations, or financial condition.

Patent Matters

As is typical in the semiconductor and other high-tech 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.

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

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

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

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


16



Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V., our Netherlands subsidiary ("Micron B.V."), in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008 pursuant to which Micron B.V. purchased substantially all of Qimonda's shares of Inotera Memories, Inc. (the "Inotera Shares"), which represents approximately 55% of our total shares in Inotera as of June 2, 2016 , and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.

Following a series of hearings with pleadings, arguments, and witnesses on behalf of the Qimonda estate, on March 13, 2014, the Court issued judgments:  (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera shares sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on such shares and all other benefits; (4) denying Qimonda's claims against Micron for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda's obligations under the patent cross-license agreement are canceled. In addition, the Court issued interlocutory judgments ordering, among other things:  (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by it and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by it from ownership of the Inotera Shares. The interlocutory judgments have no immediate, enforceable effect on us, and, accordingly, we expect to be able to continue to operate with full control of the Inotera Shares subject to further developments in the case. We have filed a notice of appeal, and the parties have submitted briefs to the appeals court.

We are unable to predict the outcome of the matter and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera Shares or monetary damages, unspecified damages based on the benefits derived by Micron B.V. from the ownership of the Inotera Shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operation, or financial condition.  As of June 2, 2016 , the Inotera Shares had a carrying value in equity method investments of $677 million and a market value of $1.07 billion.

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.


Redeemable Convertible Notes

Under the terms of the indentures governing the 2033 Notes, upon conversion, we would be required to pay cash equal to the lesser amount of (1) the aggregate principal amount or (2) the conversion value of the notes being converted. To the extent the conversion value exceeds the principal amount, we could pay cash, shares of common stock, or a combination thereof, at our option, for the amount of such excess. The 2033 Notes were convertible at the option of the holders as of September 3, 2015 and the aggregate difference between the principal amount and the carrying value of $49 million was classified as redeemable convertible notes in the accompanying consolidated balance sheet. Due to declines in the trading price of our common stock during 2016, the closing price of our common stock did not meet or exceed the thresholds for the calendar quarter ended March 31, 2016; therefore, the 2033 Notes were not convertible by the holders after March 31, 2016 and will not be convertible until the conversion terms or thresholds are met or exceeded or another convertibility condition is met. As a result, in the third quarter of 2016, the 2033 Notes were classified as noncurrent debt and the aggregate difference between the principal amount and the carrying value was reclassified from redeemable convertible notes to additional capital. (See "Debt" note.)




17



Equity

Micron Shareholders' Equity

Common Stock Repurchases :   Our Board of Directors has authorized the discretionary repurchase of up to  $1.25 billion  of our outstanding common stock, which may be made in open-market purchases, block trades, privately-negotiated transactions, or derivative transactions. During the first nine months of 2016, we repurchased 7 million  shares for  $125 million  (including commissions) through open-market transactions, which were recorded as treasury stock. Through the end of the third quarter of 2016, we had repurchased a total of 49 million  shares for  $956 million  (including commissions) through open-market transactions pursuant to such authorization. Repurchases are subject to market conditions and our ongoing determination of the best use of available cash.

Issued and Outstanding Capped Calls : We have capped calls (with strike prices that range from $9.80 to $10.93 and cap prices that range from $14.51 to $16.04 ), which were intended to reduce the effect of potential dilution from our convertible notes.  The capped calls provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our stock is above strike prices on their expiration dates, which range from November 2016 to February 2020. The amounts receivable vary based on the trading price of our stock, up to the cap prices. As of June 2, 2016, the dollar value of cash or shares that we would receive from capped calls upon their expiration date ranges from $0 , if the trading price of our stock is below strike prices for all capped calls, to $719 million , if the trading price of our stock is at or above the cap prices for all capped calls.

Expiration of Capped Calls : A portion of our 2032C Capped Calls and 2031 Capped Calls expired in the first nine months of 2016. We elected share settlement and received 2 million shares of our stock in the first nine months of 2016, equivalent to $23 million , based on the trading stock price at the time of expiration. The shares received were recorded as treasury stock.

Accumulated Other Comprehensive Income (Loss) : Changes in accumulated other comprehensive income (loss) by component for the nine months ended June 2, 2016 , were as follows:

 
 
Cumulative Foreign Currency Translation Adjustments
 
Gains (Losses) on Derivative Instruments, Net
 
Gains (Losses) on Investments, Net
 
Pension Liability Adjustments
 
Total
Balance as of September 3, 2015
 
$

 
$
(5
)
 
$
(3
)
 
$
21

 
$
13

Other comprehensive income (loss) before reclassifications
 
(50
)
 
5

 
2

 
(6
)
 
(49
)
Amount reclassified out of accumulated other comprehensive income (loss)
 

 
(3
)
 

 
(1
)
 
(4
)
Tax effects
 

 

 

 
2

 
2

Other comprehensive income (loss)
 
(50
)
 
2

 
2

 
(5
)
 
(51
)
Balance as of June 2, 2016
 
$
(50
)
 
$
(3
)
 
$
(1
)
 
$
16

 
$
(38
)

Noncontrolling Interests in Subsidiaries

As of
 
June 2, 2016
 
September 3, 2015
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT (1)
 
$
832

 
49
%
 
$
829

 
49
%
MP Mask (1)
 

 
%
 
93

 
50
%
Other
 
15

 
Various

 
15

 
Various

 
 
$
847

 
 
 
$
937

 
 
(1)  
IMFT is a variable interest entity. MP Mask was a variable interest entity through May 5, 2016. (See "Variable Interest Entities" note.)


18



IMFT : Since IMFT's inception in 2006, we have owned 51% of IMFT, a joint venture between us and Intel to manufacture NAND Flash and 3D XPoint memory products for the exclusive use of the members. IMFT is governed by a Board of Managers, for which the number of managers appointed by each member varies based on the members' respective ownership interests. The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights.  On January 5, 2016, we amended the IMFT joint venture agreement to change the dates of the buy-sell rights. Pursuant to the amendment, commencing in January 2016, Intel can put to us, and commencing in January 2019, we can call from Intel, Intel's interest in IMFT, in either case, for an amount equal to the noncontrolling interest balance attributable to Intel at such time. If Intel exercises its put right, we can elect to set the closing date of the transaction to be any time within two years following such election by Intel and can elect to receive financing of the purchase price from Intel for one to two years from the closing date.

IMFT manufactures memory products using designs and technology we develop with Intel. We generally share with Intel the costs of product design and process development activities for NAND Flash and 3D XPoint memory. Our R&D expenses were reduced by reimbursements from Intel of $54 million and $153 million for the third quarter and first nine months of 2016, respectively, and $58 million and $158 million for the third quarter and first nine months of 2015 , respectively.

Our sales include Non-Trade Non-Volatile Memory, which primarily consists of products sold to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. Non-Trade Non-Volatile Memory sales were $120 million and $372 million for the third quarter and first nine months of 2016, respectively, and were $110 million and $342 million for the third quarter and first nine months of 2015 , respectively.

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

As of
 
June 2,
2016
 
September 3,
2015
Assets
 
 
 
 
Cash and equivalents
 
$
100

 
$
134

Receivables
 
85

 
79

Inventories
 
73

 
65

Other current assets
 
4

 
7

Total current assets
 
262

 
285

Property, plant, and equipment, net
 
1,775

 
1,768

Other noncurrent assets
 
49

 
49

Total assets
 
$
2,086

 
$
2,102

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
196

 
$
182

Deferred income
 
8

 
9

Current debt
 
17

 
22

Total current liabilities
 
221

 
213

Long-term debt
 
37

 
49

Other noncurrent liabilities
 
96

 
100

Total liabilities
 
$
354

 
$
362

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

Creditors of IMFT have recourse only to IMFT's assets and do not have recourse to any other of our assets.


19



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

 
 
Quarter Ended
 
Nine Months Ended
 
 
June 2,
2016
 
June 4,
2015
 
June 2,
2016
 
June 4,
2015
IMFT distributions to Micron
 
$
36

 
$

 
$
36

 
$
6

IMFT distributions to Intel
 
34

 

 
34

 
6

Micron contributions to IMFT
 

 
85

 
38

 
106

Intel contributions to IMFT
 

 
82

 
37

 
102


MP Mask : In 2006, we formed a joint venture with Photronics to produce photomasks for leading-edge and advanced next generation semiconductors.  Through May 5, 2016, we and Photronics each owned approximately 50% of MP Mask.  We purchased a substantial majority of the photomasks produced by MP Mask pursuant to a supply arrangement. On May 5, 2016 we acquired Photronics' interest in MP Mask for $93 million .

The assets and liabilities of MP Mask included in our September 3, 2015 consolidated balance sheet were as follows:

As of
 
September 3,
2015
Current assets
 
$
21

Noncurrent assets (primarily property, plant, and equipment)
 
180

Current liabilities
 
21

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

Restrictions on Net Assets

As a result of the reorganization proceedings of the MMJ Companies initiated in March 2012, and for so long as such proceedings continue, the MMJ Group is subject to certain restrictions on dividends, loans, and advances. In addition, our ability to access IMFT's cash and other assets through dividends, loans, or advances, including to finance our other operations, is subject to agreement by Intel. As a result, our total restricted net assets (net assets less intercompany balances and noncontrolling interests) as of June 2, 2016 were $3.17 billion for the MMJ Group and $900 million for IMFT, which included cash and equivalents of $598 million for the MMJ Group and $100 million for IMFT.

As of June 2, 2016 , our retained earnings included undistributed earnings from our equity method investees of $281 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).

All of our marketable debt and equity investments (excluding equity method investments) were classified as available-for-sale and carried at fair value. In addition to the fair value measurements disclosed in "Cash and Investments" as of June 2, 2016 and September 3, 2015 , we had certificates of deposit classified as restricted cash (included in other noncurrent assets) of $48 million and $45 million , respectively, valued using Level 2 fair value measurements.

In connection with our repurchases of debt in the first quarter of 2016, we determined the fair value of the debt components of our convertible notes as if they were stand-alone instruments, using interest rates for similar nonconvertible debt issued by entities with credit ratings comparable to ours (Level 2).


20



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 and mezzanine equity components of our convertible notes) were as follows:

As of
 
June 2, 2016
 
September 3, 2015
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ creditor installment payments
 
$
6,723

 
$
7,023

 
$
5,020

 
$
5,077

Convertible notes
 
1,988

 
1,445

 
2,508

 
1,472


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


Derivative Instruments

We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from our monetary assets and liabilities denominated in currencies other than the U.S. dollar. We have also had convertible note settlement obligations which were accounted for as derivative instruments as a result of our elections to settle conversions in cash. We do not use derivative instruments for speculative purpose.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives : To hedge our exposures of monetary assets and liabilities to changes in currency exchange rates, we generally utilize a rolling hedge strategy with currency forward contracts that mature within 35 days.  At the end of each reporting period, monetary assets and liabilities 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 (Level 2 fair value measurements). To mitigate the risk of the yen strengthening against the U.S. dollar on the MMJ creditor installment payments due in December 2014 and December 2015, we entered into forward contracts to purchase 20 billion yen on November 28, 2014 and 10 billion yen on November 27, 2015. In the first quarters of 2016 and 2015, we paid $21 million and $33 million , respectively, upon settlement of the forward contracts.


21



The following summarizes our derivative instruments without hedge accounting designation, which consisted of forward contracts to purchase the noted currencies as a hedge of our net position in monetary assets:

 
 
Notional Amount (in U.S. dollars)
 
Fair Value of
Current Assets (1)
 
Current Liabilities (2)
As of June 2, 2016
 
 
 
 
 
 
Yen
 
$
1,298

 
$
14

 
$

Singapore dollar
 
179

 

 

Euro
 
50

 

 

Other
 
93

 
1

 

 
 
$
1,620

 
$
15

 
$

As of September 3, 2015
 
 
 
 
 
 
Yen
 
$
928

 
$

 
$
(24
)
Singapore dollar
 
282

 

 

Euro
 
29

 

 

Other
 
167

 
1