2014 Q3


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 2014

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 26, 2014, was 1,070,823,247.

 
 
 
 
 



PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 29,
2014
 
May 30,
2013
 
May 29,
2014
 
May 30,
2013
Net sales
 
$
3,982

 
$
2,318

 
$
12,131

 
$
6,230

Cost of goods sold
 
2,614

 
1,762

 
8,079

 
5,091

Gross margin
 
1,368

 
556

 
4,052

 
1,139

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
174

 
127

 
527

 
369

Research and development
 
349

 
226

 
1,013

 
664

Restructure and asset impairments
 
9

 
55

 
18

 
94

Other operating (income) expense, net
 
(3
)
 
(1
)
 
235

 
(17
)
Operating income
 
839

 
149

 
2,259

 
29

 
 
 
 
 
 
 
 
 
Interest income
 
5

 
2

 
16

 
8

Interest expense
 
(80
)
 
(54
)
 
(264
)
 
(167
)
Other non-operating income (expense), net
 
(21
)
 
(45
)
 
(223
)
 
(263
)
 
 
743

 
52

 
1,788

 
(393
)
 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
(72
)
 
1

 
(215
)
 
(3
)
Equity in net income (loss) of equity method investees
 
135

 
(10
)
 
355

 
(120
)
Net income (loss)
 
806

 
43

 
1,928

 
(516
)
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
—

 
—

 
(33
)
 
(2
)
Net income (loss) attributable to Micron
 
$
806

 
$
43

 
$
1,895

 
$
(518
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 

 
 
 
 
Basic
 
$
0.76

 
$
0.04

 
$
1.79

 
$
(0.51
)
Diluted
 
0.68

 
0.04

 
1.58

 
(0.51
)
 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
1,067

 
1,024

 
1,058

 
1,018

Diluted
 
1,190

 
1,047

 
1,196

 
1,018








See accompanying notes to consolidated financial statements.

1


MICRON TECHNOLOGY, INC.

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 29,
2014
 
May 30,
2013
 
May 29,
2014
 
May 30,
2013
Net income (loss)
 
$
806

 
$
43

 
$
1,928

 
$
(516
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(13
)
 
(7
)
 
(17
)
 
2

Gain (loss) on derivative instruments, net
 
(2
)
 
(1
)
 
(6
)
 
(9
)
Gain (loss) on investments, net
 
—

 
(1
)
 
2

 
(2
)
Pension liability adjustments
 
—

 
—

 
2

 
(1
)
Other comprehensive income (loss)
 
(15
)
 
(9
)
 
(19
)
 
(10
)
Total comprehensive income (loss)
 
791

 
34

 
1,909

 
(526
)
Comprehensive (income) loss attributable to noncontrolling interests
 
—

 
(1
)
 
(33
)
 
(3
)
Comprehensive income (loss) attributable to Micron
 
$
791

 
$
33

 
$
1,876

 
$
(529
)


































See accompanying notes to consolidated financial statements.

2


MICRON TECHNOLOGY, INC.

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

As of
 
May 29,
2014
 
August 29,
2013
Assets
 
 
 
 
Cash and equivalents
 
$
4,062

 
$
2,880

Short-term investments
 
202

 
221

Receivables
 
2,715

 
2,329

Inventories
 
2,532

 
2,649

Restricted cash
 
—

 
556

Other current assets
 
194

 
276

Total current assets
 
9,705

 
8,911

Long-term marketable investments
 
545

 
499

Property, plant and equipment, net
 
8,021

 
7,626

Equity method investments
 
744

 
396

Intangible assets, net
 
343

 
386

Deferred tax assets
 
693

 
861

Other noncurrent assets
 
444

 
439

Total assets
 
$
20,495

 
$
19,118

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
2,828

 
$
2,115

Deferred income
 
282

 
243

Equipment purchase contracts
 
142

 
182

Current debt
 
1,508

 
1,585

Total current liabilities
 
4,760

 
4,125

Long-term debt
 
4,137

 
4,452

Other noncurrent liabilities
 
813

 
535

Total liabilities
 
9,710

 
9,112

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
88

 
—

 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,070 shares issued and outstanding (1,044 as of August 29, 2013)
 
107

 
104

Additional capital
 
8,210

 
9,187

Retained earnings (accumulated deficit)
 
1,579

 
(212
)
Accumulated other comprehensive income
 
44

 
63

Total Micron shareholders' equity
 
9,940

 
9,142

Noncontrolling interests in subsidiaries
 
757

 
864

Total equity
 
10,697

 
10,006

Total liabilities and equity
 
$
20,495

 
$
19,118



See accompanying notes to consolidated financial statements.

3


MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, Unaudited)
Nine Months Ended
 
May 29,
2014
 
May 30,
2013
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
1,928

 
$
(516
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation expense and amortization of intangible assets
 
1,550

 
1,354

Amortization of debt discount and other costs
 
130

 
86

Loss on restructure of debt
 
182

 
31

Stock-based compensation
 
81

 
61

Adjustment to gain on MMJ Acquisition
 
33

 
—

(Gains) losses from currency hedges, net
 
19

 
224

Equity in net (income) loss of equity method investees
 
(355
)
 
120

Noncash restructure and asset impairments
 
(17
)
 
91

Change in operating assets and liabilities:
 
 
 
 
Receivables
 
(330
)
 
(280
)
Inventories
 
117

 
38

Accounts payable and accrued expenses
 
575

 
44

Customer prepayments
 
71

 
(95
)
Deferred income taxes, net
 
184

 
(5
)
Other
 
184

 
(59
)
Net cash provided by operating activities
 
4,352

 
1,094

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Expenditures for property, plant and equipment
 
(1,518
)
 
(964
)
Purchases of available-for-sale securities
 
(475
)
 
(574
)
Payments to settle hedging activities
 
(25
)
 
(216
)
Decrease in restricted cash
 
559

 
1

Proceeds from sales and maturities of available-for-sale securities
 
442

 
592

Proceeds from settlement of hedging activities
 
16

 
23

Other
 
78

 
(32
)
Net cash provided by (used for) investing activities
 
(923
)
 
(1,170
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Repayments of debt
 
(3,134
)
 
(664
)
Payments on equipment purchase contracts
 
(292
)
 
(162
)
Cash paid to purchase common stock under equity plans
 
(75
)
 
(5
)
Cash paid for capped call transactions
 
—

 
(48
)
Proceeds from issuance of debt
 
1,062

 
812

Proceeds from issuance of common stock under equity plans
 
247

 
68

Proceeds from equipment sale-leaseback transactions
 
14

 
106

Cash received from capped call transactions
 
—

 
24

Other
 
(56
)
 
(74
)
Net cash provided by (used for) financing activities
 
(2,234
)
 
57

 
 
 
 
 
Effect of changes in currency exchange rates on cash and cash equivalents
 
(13
)
 
—

 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
1,182

 
(19
)
Cash and equivalents at beginning of period
 
2,880

 
2,459

Cash and equivalents at end of period
 
$
4,062

 
$
2,440

 
 
 
 
 
Noncash investing and financing activities:
 
 
 
 
Exchange of convertible notes
 
$
756

 
$
—

Acquisition of noncontrolling interest
 
127

 
—

Equipment acquisitions on contracts payable and capital leases
 
294

 
387

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., including its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise), is one of the world's leading providers of advanced semiconductor solutions. Through our worldwide operations, we manufacture and market a full range of DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile 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 29, 2013. 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. Our third quarters of fiscal 2014 and 2013 ended on May 29, 2014 and May 30, 2013, 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 29, 2013.


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 judgments.

Unconsolidated Variable Interest Entities

Inotera: Inotera Memories, Inc. ("Inotera") is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from its shareholders. 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 Technology Corporation ("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 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 ("Financing Entities"). Neither we nor the Financing Entities have an equity ownership 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 Financing Entities and because the third-party equity holder lacks characteristics of a controlling financial interest. By design, the arrangements with the EQUVO Entities are merely financing vehicles 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.


5


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. SCHE is a VIE due to the nature of its tolling agreements with us and our purchase and call options for SCHE's assets. We do not have an equity ownership interest in SCHE. 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.

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.  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.  As a result, we have determined that we have the power to direct the activities of IMFT that most significantly impact its economic performance and, therefore, we consolidate IMFT.

MP Mask: MP Mask Technology Center, LLC ("MP Mask") is a VIE because substantially 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 have tie-breaking voting rights over key operating decisions and 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.  As a result, we have determined that we have the power to direct the activities of MP Mask that most significantly impact its economic performance and, therefore, we consolidate MP Mask.

For further information regarding our consolidated VIEs, see "Equity – Noncontrolling Interests in Subsidiaries" note.


Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09 – Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP.  The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  This ASU will be effective for us in our first quarter of 2018.  Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.


Micron Memory Japan, Inc.

On July 31, 2013, we acquired Elpida Memory, Inc. ("Elpida"), now known as Micron Memory Japan, Inc. ("MMJ"), and 89% of Rexchip Electronics Corporation ("Rexchip''), now known as Micron Memory Taiwan Co., Ltd. ("MMT"), for an aggregate of $949 million in cash (collectively, the "MMJ Acquisition"). In the second and third quarters of 2014, we purchased an additional aggregate 10.6% of MMT's outstanding common stock, after which we owned 99.5% of the outstanding common stock of MMT. (See "Equity – Noncontrolling Interests in Subsidiaries – MMT" note.) Both MMJ and MMT manufacture semiconductor memory products including mobile DRAM targeted toward mobile phones and tablets.

In connection with the MMJ Acquisition, we recorded net assets of $2.60 billion and noncontrolling interests of $168 million. Because the fair value of the net assets acquired, less noncontrolling interests, exceeded our purchase price, we recognized a gain on the acquisition of $1.48 billion. In the second quarter of 2014, the provisional amounts as of the acquisition date were adjusted, primarily for pre-petition liabilities. As a result, we recorded a charge of $33 million in the second quarter of 2014 in other non-operating expense for these measurement period adjustments to adjust the gain on the MMJ Acquisition.


6


The following unaudited pro forma financial information presents the combined results of operations as if the MMJ Acquisition had occurred on September 2, 2011.  The pro forma financial information includes the accounting effects of the business combination, including adjustments to the amortization of intangible assets, depreciation of property, plant and equipment, interest expense and elimination of intercompany activities.  The unaudited pro forma financial information for the quarter and nine months ended May 30, 2013 includes our results for the quarter and nine months ended May 30, 2013 and the results of MMJ and MMT, including the adjustments described above, for the quarter and nine months ended March 31, 2013. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the MMJ Acquisition occurred on September 2, 2011.

 
 
Quarter Ended
May 30,
2013
 
Nine Months Ended
May 30,
2013
Net sales
 
$
3,314

 
$
8,844

Net income
 
2,068

 
1,697

Net income attributable to Micron
 
2,049

 
1,655

Earnings per share:
 
 
 
 
Basic
 
$
2.00

 
$
1.63

Diluted
 
1.96

 
1.60



Investments

The fair values of available-for-sale investments, which approximated amortized costs, were as follows:

As of
 
May 29,
2014
 
August 29,
2013
Money market funds
 
$
370

 
$
1,188

Corporate bonds
 
446

 
414

Certificates of deposit
 
294

 
349

Government securities
 
158

 
168

Asset-backed securities
 
117

 
97

Commercial paper
 
25

 
61

Marketable equity securities
 
1

 
6

 
 
$
1,411

 
$
2,283


The table below presents the fair value of available-for-sale debt securities by contractual maturity:

As of
 
May 29,
2014
Money market funds
 
$
370

Due in 1 year or less
 
496

Due in 1 - 2 years
 
262

Due in 2 - 4 years
 
273

Due after 4 years
 
9

 
 
$
1,410


Proceeds from the sales of available-for-sale securities were $78 million and $301 million for the third quarter and first nine months of 2014, respectively, and $346 million and $481 million for the third quarter and first nine months of 2013, respectively. Gross realized gains and losses for the third quarters and first nine months of 2014 and 2013 were not significant. As of May 29, 2014, no available-for-sale security had been in a loss position for longer than 12 months.



7


Receivables

As of
 
May 29,
2014
 
August 29,
2013
Trade receivables (net of allowance for doubtful accounts of $4 and $5, respectively)
 
$
2,357

 
$
2,069

Income and other taxes
 
73

 
74

Other
 
285

 
186

 
 
$
2,715

 
$
2,329


As of May 29, 2014 and August 29, 2013, other receivables included $76 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.  (See "Equity – Noncontrolling Interests in Subsidiaries – IMFT" note.)


Inventories

As of
 
May 29,
2014
 
August 29,
2013
Finished goods
 
$
883

 
$
796

Work in process
 
1,474

 
1,719

Raw materials and supplies
 
175

 
134

 
 
$
2,532

 
$
2,649



Property, Plant and Equipment

As of
 
May 29,
2014
 
August 29,
2013
Land
 
$
86

 
$
86

Buildings
 
5,016

 
4,835

Equipment
 
16,822

 
15,600

Construction in progress
 
115

 
84

Software
 
340

 
315

 
 
22,379

 
20,920

Accumulated depreciation
 
(14,358
)
 
(13,294
)
 
 
$
8,021

 
$
7,626


Depreciation expense was $508 million and $1.46 billion for the third quarter and first nine months of 2014, respectively, and $421 million and $1.29 billion for the third quarter and first nine months of 2013, respectively. Other noncurrent assets included land held for development of $56 million as of May 29, 2014 and $54 million as of August 29, 2013.




8


Equity Method Investments

As of
 
May 29, 2014
 
August 29, 2013
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera(1)
 
$
689

 
33
%
 
$
344

 
35
%
Tera Probe
 
44

 
40
%
 
40

 
40
%
Other
 
11

 
Various

 
12

 
Various

 
 
$
744

 
 
 
$
396

 
 
(1) Entity is a variable interest entity.

As of May 29, 2014, substantially all of our maximum exposure to loss from our VIEs that were not consolidated was the $689 million carrying value of our investment in Inotera.  We may also incur losses in connection with our rights and obligations to purchase substantially all of Inotera's wafer production capacity under a supply agreement with Inotera.

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 29,
2014
 
May 30,
2013
 
May 29,
2014
 
May 30,
2013
Inotera
 
$
134

 
$
(13
)
 
$
349

 
$
(121
)
Tera Probe
 
2

 
—

 
8

 
—

Other
 
(1
)
 
3

 
(2
)
 
1

 
 
$
135

 
$
(10
)
 
$
355

 
$
(120
)

Inotera

We have partnered with Nanya in Inotera, a Taiwan DRAM memory company, since 2009.  On May 15, 2014, Inotera issued 400 million common shares in a public offering at a price equal to 31.50 New Taiwan dollars per share, which was in excess of our carrying value per share. We did not purchase any shares in the offering and our ownership interest decreased from 35% to 33%. As a result of Inotera's offering, we will recognize a non-operating gain of approximately $90 million. Because we recognize the effects of our investment in Inotera on a two-month lag, the gain will be recorded in our fourth quarter of 2014. As of May 29, 2014, we held a 33% ownership interest, Nanya and its affiliates held a 33% ownership interest and the remaining ownership interest in Inotera was publicly held.

As of May 29, 2014, the market value of our equity interest in Inotera was $3.01 billion based on the closing trading price of 42.30 New Taiwan dollars of its shares in an active market. As of May 29, 2014 and August 29, 2013, there were gains of $30 million and $44 million, respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.

As of December 31, 2013, 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 December 31, 2013 financial covenants. As of March 31, 2014, Inotera's liquidity position had improved and its current assets exceeded its current liabilities by $239 million.


9


Through December 2012, we had rights and obligations to purchase 50% of Inotera's wafer production capacity based on a margin-sharing formula among Nanya, Inotera and us. In the second quarter of 2013, we entered into agreements with Nanya and Inotera to amend the joint venture relationship involving Inotera. The amendments included a new supply agreement with Inotera (the "Inotera Supply Agreement") under which we are obligated to purchase substantially all of Inotera's DRAM output at a discount from market prices for our comparable components over an initial three-year term. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive one-year extensions, and if in any year the parties do not agree to an extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down period. Our share of Inotera's capacity would decline over the three-year wind-down period. In the second quarter of 2014, we extended the initial period of the Inotera Supply Agreement through December 2016. Under the Inotera supply agreements, we purchased $700 million and $2.00 billion of DRAM products in the third quarter and first nine months of 2014, respectively, and $341 million and $742 million in the third quarter and first nine months of 2013, respectively.

Pursuant to a cost-sharing arrangement with Nanya, which was effective through December 31, 2012, our research and development ("R&D") costs were reduced by $19 million in the first nine months of 2013. Nanya ceased participating in the joint development program after December 31, 2012.

Tera Probe

In the fourth quarter of 2013, as part of the MMJ Acquisition, we acquired a 40% interest in Tera Probe, Inc. ("Tera Probe"), which provides semiconductor wafer testing and probe services to us and others. The initial net carrying value of our investment was less than our proportionate share of Tera Probe's equity and the difference is being amortized as a credit to earnings through equity in net income (loss) of equity method investees (the "Tera Probe Amortization"). As of May 29, 2014, the remaining balance of the Tera Probe Amortization was $28 million and is expected to be amortized over a weighted-average period of 6 years.

As of May 29, 2014, the market value of our equity interest in Tera Probe was $37 million based on the closing trading price of its shares in an active market, which was $7 million below our carrying value. We evaluated our investment in Tera Probe and concluded that the decline in the market value below our carrying value was not an other-than-temporary impairment primarily because of the market value improvement subsequent to May 29, 2014, the limited amount of time the fair value was below the carrying value and historical volatility of the stock price.

We incurred manufacturing costs for the third quarter and first nine months of 2014 of $24 million and $88 million, respectively, for services performed by Tera Probe.

Other

Aptina: Other equity method investments included an equity interest in Aptina Imaging Corporation ("Aptina"). The amount of cumulative loss we recognized from our investment in Aptina reduced our investment balance to zero in 2012, at which time we ceased recognizing our proportionate share of Aptina's results of operations.

In the third quarter and first nine months of 2013, we recognized net sales of $61 million and $170 million, respectively, and cost of goods sold of $70 million and $208 million, respectively, from products sold to Aptina under a wafer supply agreement. In the third quarter of 2013, in connection with our sale of Micron Technology Italia, S.r.l. ("MIT") to LFoundry Marsica S.r.l. ("LFoundry"), we assigned to LFoundry our supply agreement with Aptina to manufacture image sensors at MIT. In 2013, we also loaned $45 million to Aptina under a short-term, interest-free, unsecured agreement which was repaid in the first six months of 2014.

On June 9, 2014, ON Semiconductor Corporation announced that it will pay approximately $400 million to acquire Aptina, subject to certain customary closing adjustments. The transaction is expected to close in the fourth quarter of 2014 or first quarter of 2015, subject to required regulatory approvals and customary closing conditions. Upon the successful completion of ON Semiconductor's acquisition of Aptina, our proportionate share of the acquisition proceeds would be based on our diluted ownership interest of approximately 27%.




10


Intangible Assets

As of
 
May 29, 2014
 
August 29, 2013
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
670

 
$
(328
)
 
$
642

 
$
(269
)
Customer relationships
 
127

 
(126
)
 
127

 
(114
)
Other
 
16

 
(16
)
 
—

 
—

 
 
$
813

 
$
(470
)
 
$
769

 
$
(383
)

During the first nine months of 2014 and 2013, we capitalized $29 million and $24 million, respectively, for product and process technology with weighted-average useful lives of 10 years.

Amortization expense was $34 million and $88 million for the third quarter and first nine months of 2014, respectively, and $21 million and $62 million for the third quarter and first nine months of 2013, respectively.  Annual amortization expense is estimated to be $108 million for 2014, $77 million for 2015, $65 million for 2016, $55 million for 2017 and $44 million for 2018.


Accounts Payable and Accrued Expenses

As of
 
May 29,
2014
 
August 29,
2013
Accounts payable
 
$
1,348

 
$
1,048

Related party payables
 
703

 
374

Salaries, wages and benefits
 
410

 
267

Customer advances
 
96

 
140

Income and other taxes
 
54

 
47

Other
 
217

 
239

 
 
$
2,828

 
$
2,115


As of May 29, 2014 and August 29, 2013, related party payables included $694 million and $345 million, respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement. As of May 29, 2014 and August 29, 2013, related party payables also included $9 million and $29 million, respectively, due to Tera Probe for probe services performed. (See "Equity Method Investments" note.)

As of May 29, 2014, customer advances included $90 million for amounts received from a customer in the first quarter of 2014 under a DRAM supply agreement to be applied to purchases at market pricing through September 2016. As of May 29, 2014, other noncurrent liabilities included an additional $113 million from this DRAM supply agreement. As of August 29, 2013, customer advances included $134 million for amounts received from Intel to be applied to purchases under a NAND Flash supply agreement.




11


Debt

As of
 
 
 
 
 
May 29, 2014
 
August 29, 2013
Instrument(1)
 
Stated Rate
 
Effective Rate
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
MMJ creditor installment payments; $1,396 and $1,969 principal amount
N/A

 
6.25
%
 
$
193

 
$
943

 
$
1,136

 
$
527

 
$
1,117

 
$
1,644

Capital lease obligations;
imputed rate of 4.31% and 4.07%
 
N/A

 
N/A

 
347

 
621

 
968

 
407

 
845

 
1,252

2014 convertible senior notes;
$0 and $485 principal amount
 
1.875
%
 
7.88
%
 
—

 
—

 
—

 
465

 
—

 
465

2019 senior notes;
$462 principal amount
 
1.258
%
 
1.97
%
 
92

 
370

 
462

 
—

 
—

 
—

2022 senior notes;
$600 principal amount
 
5.875
%
 
6.16
%
 
—

 
600

 
600

 
—

 
—

 
—

2027 convertible senior notes;
$0 and $175 principal amount
 
1.875
%
 
6.95
%
 
—

 
—

 
—

 
—

 
147

 
147

2031A convertible senior notes;
$0 and $345 principal amount
 
1.500
%
 
6.55
%
 
—

 
—

 
—

 
—

 
277

 
277

2031B convertible senior notes;(2)(3)
$114 and $345 principal amount
 
1.875
%
 
6.98
%
 
86

 
—

 
86

 
—

 
253

 
253

2032C convertible senior notes;(2)
$390 and $550 principal amount
 
2.375
%
 
5.95
%
 
—

 
336

 
336

 
—

 
463

 
463

2032D convertible senior notes;(2)
$374 and $450 principal amount
 
3.125
%
 
6.33
%
 
—

 
311

 
311

 
—

 
369

 
369

2033E convertible senior notes;(2)(3)
$300 principal amount
 
1.625
%
 
4.50
%
 
276

 
—

 
276

 
—

 
272

 
272

2033F convertible senior notes;(2)(3)
$300 principal amount
 
2.125
%
 
4.93
%
 
264

 
—

 
264

 
—

 
260

 
260

2043G convertible senior notes;
$1,025 principal amount
 
3.000
%
 
6.77
%
 
—

 
633

 
633

 
—

 
—

 
—

Other notes payable
 
3.082
%
 
3.67
%
 
250

 
323

 
573

 
186

 
449

 
635

 
 
 
 
 
 
$
1,508

 
$
4,137

 
$
5,645

 
$
1,585

 
$
4,452

 
$
6,037

(1) We have either the obligation or the option to pay cash for the aggregate 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) Since the closing price of our common stock for at least 20 trading days in the 30 trading day period ended March 31, 2014 exceeded 130% of the initial conversion price per share, holders had the right to convert their notes at any time during the calendar quarter ended June 30, 2014. The closing price of our common stock also exceeded the thresholds for the calendar quarter ended June 30, 2014 and these notes are therefore convertible by the holders through September 30, 2014.
(3) As a result of these notes being convertible at the option of the holder through June 30, 2014, and because the terms of these notes would require us to pay cash for the principal amount of any converted notes, amounts are classified as current.

Debt Restructure

During the first, second and third quarters of 2014, we initiated a series of actions to restructure our debt as follows:

•
Exchange Transactions: In November 2013, we exchanged $440 million in aggregate principal amount of our 2027 Notes, 2031A Notes and 2031B Notes into 3.00% Convertible Senior Notes due 2043.
•
Debt Conversions and Settlements: In the second and third quarters of 2014, holders of substantially all of our remaining 2014 Notes, 2027 Notes, 2031A Notes (with an aggregate principal amount of $770 million) converted their notes and we settled the conversions in cash for $1,446 million.
•
Cash Repurchases: In the second and third quarters of 2014, we repurchased $263 million in aggregate principal amount of our 2031B Notes, 2032C Notes and 2032D Notes in privately-negotiated transactions for an aggregate of $660 million in cash.

12


•
Issuance of Non-Convertible Notes: In February 2014, we issued $600 million in principal amount of 5.875% senior notes due February 2022.

Exchange Transactions: On November 12, 2013, in a series of separate non-cash transactions, we exchanged portions of our 2027 Notes, 2031A Notes and 2031B Notes (collectively, the "Exchanged Notes") into 3.00% Convertible Senior Notes due 2043 (the "2043G Notes") (collectively, the "Exchange Transactions"). In connection with the Exchange Transactions, which were accounted for as extinguishments, we issued to holders of the Exchanged Notes new 2043G Notes with an aggregate principal amount at issuance of $820 million, which accretes up to a principal amount at maturity of $1.03 billion (see further discussion in "2043G Notes" below). The liability and equity components of the Exchanged Notes had previously been stated separately within debt and additional capital in our consolidated balance sheet. As a result, our accounting for the Exchanged Notes affected debt and equity. In connection with the Exchange Transactions, we recognized a loss of $38 million based on the difference between the carrying values and the fair values of the debt components of the Exchanged Notes, which was included in other non-operating expense for the first quarter of 2014. The fair value for the debt component of each of the Exchanged Notes was determined as if they were stand-alone instruments using interest rates for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance (based on Level 2 fair value measurements). The table below summarizes the Exchange Transactions:
 
 
 
Principal Amount
 
Carrying Value of Debt
 
Equity
Amounts reduced in connection with the Exchanged Notes:
 
 
 
 
 
 
2027 Notes
 
$
80

 
$
68

 
$
51

2031A Notes
 
155

 
125

 
148

2031B Notes
 
205

 
152

 
212

 
 
440

 
345

 
411

Amounts added in connection with the issued notes:
 
 
 
 
 
 
2043G Notes
 
1,025

 
627

 
173

 
 
 
 
 
 
 
Net increase (decrease) as a result of the Exchange Transactions
 
$
585

 
$
282

 
$
(238
)

Debt Conversions and Settlements: During the first and second quarters of 2014, we initiated a series of actions resulting in a number of debt conversions and settlements. Those actions included the following:

Termination of Conversion Rights of our 2027 Notes – On November 7, 2013, we announced the termination of the conversion rights for our remaining 2027 Notes, effective on December 13, 2013. During the first and second quarters of 2014, substantially all of the holders of our 2027 Notes exercised their option to convert their notes and, in each case, we elected to settle the conversion amount entirely in cash.

Redemption of our 2031A Notes – On November 7, 2013, we called for the redemption of our remaining 2031A Notes on December 7, 2013. During the first and second quarters of 2014, substantially all of the holders of our 2031A Notes exercised their option to convert their notes and, in each case, we elected to settle the conversion amount entirely in cash.

Redemption of our 2014 Notes – On January 31, 2014, we called for the redemption of our remaining 2014 Notes on March 3, 2014. During the second and third quarters of 2014, substantially all of the holders of our 2014 Notes exercised their option to convert their notes and, in each case, we elected to settle the conversion amount entirely in cash.


13


As a result of our elections to settle the conversion amounts in cash, each of the settlement obligations became derivative debt liabilities subject to mark-to-market accounting treatment. Under the terms of the indentures for the above notes, cash settlement amounts for these derivative debt liabilities were determined based on the shares underlying the converted notes multiplied by the volume-weighted-average price of our common stock over a period of 20 consecutive trading days, beginning three days after the holder's election to convert their notes. Therefore, we reclassified the fair values of the equity components of each of the converted notes from additional capital to derivative debt liabilities within current debt in our consolidated balance sheet. In connection with the above, we used an aggregate of $718 million and $728 million in cash in the third and second quarters of 2014, respectively, to settle conversions. A summary of the conversions for these notes is as follows:

 
 
Debt Principal Converted
 
Carrying Value of Debt Converted
 
Equity Component Reclassified To Debt(1)
 
Mark-to-Market Loss(Gain)(2)
 
Loss on Settlement(2)
Quarter ended November 28, 2013:
 
 
 
 
 
 
 
 
 
 
2027 Notes
 
$
—

 
$
—

 
$
58

 
$
22

 
$
—

2031A Notes
 
—

 
—

 
115

 
15

 
—

 
 
—

 
—

 
173

 
37

 
—

 
 
 
 
 
 
 
 
 
 
 
Quarter ended February 27, 2014:
 
 
 
 
 
 
 
 
 
 
2014 Notes
 
66

 
65

 
309

 
(1
)
 
1

2027 Notes
 
95

 
80

 
—

 
4

 
15

2031A Notes
 
190

 
154

 
102

 
12

 
38

 
 
351

 
299

 
411

 
15

 
54

 
 
 
 
 
 
 
 
 
 
 
Quarter ended May 29, 2014:
 
 
 
 
 
 
 
 
 
 
2014 Notes
 
419

 
413

 
32

 
2

 
7

 
 
 
 
 
 
 
 
 
 
 
Nine months ended May 29, 2014
 
$
770

 
$
712

 
$
616

 
$
54

 
$
61

(1) Based on Level 2 fair value measurements.
(2) Included in non-operating expense.

Cash Repurchases: In January 2014, we repurchased $164 million in aggregate principal amount of our 2031B Notes, 2032C Notes and 2032D Notes in privately-negotiated transactions for an aggregate of $407 million in cash. In April 2014, we repurchased $60 million in aggregate principal amount of our 2032C Notes in privately-negotiated transactions for an aggregate of $142 million in cash. In May 2014, we repurchased $39 million in aggregate principal amount of our 2032D Notes in privately-negotiated transactions for an aggregate of $111 million in cash. These notes repurchased in January, April and May 2014 are collectively referred to herein as the "Repurchased Notes." In connection with the purchase of the Repurchased Notes, we recognized losses (based on Level 2 fair value measurements) of $7 million and $11 million in the third and second quarters of 2014, respectively, which were included in other non-operating expense.


14


The liability and equity components of the Repurchased Notes had previously been stated separately within debt and additional capital in our consolidated balance sheet. As a result, our accounting for the Repurchased Notes affected debt and equity. The table below summarizes activity in the second and third quarters of 2014 with respect to Repurchased Notes:

 
 
Principal Amount
 
Carrying Value of Debt
 
Equity
Quarter ended February 27, 2014:
 
 
 
 
 
 
2031B Notes
 
$
26

 
$
19

 
$
43

2032C Notes
 
100

 
85

 
159

2032D Notes
 
38

 
31

 
60

 
 
164

 
135

 
262

 
 
 
 
 
 
 
Quarter ended May 29, 2014:
 
 
 
 
 
 
2032C Notes
 
60

 
51

 
86

2032D Notes
 
39

 
32

 
76

 
 
99

 
83

 
162

 
 
 
 
 
 
 
 
 
$
263

 
$
218

 
$
424


Issuance of Non-Convertible Notes: On February 5, 2014, we issued $600 million in principal amount of 5.875% Senior Notes due February 2022 (the "2022 Notes"). Issuance costs for the 2022 Notes totaled $14 million.

The 2022 Notes contain covenants that, among other things, limit, in certain circumstances, our ability and/or the ability of our domestic restricted subsidiaries (which are generally subsidiaries in the U.S. in which we own at least 80% of the voting stock) to (1) create or incur certain liens and enter into sale and lease-back transactions, (2) create, assume, incur or guarantee certain additional secured indebtedness and unsecured indebtedness of certain of our domestic restricted subsidiaries, and (3) consolidate with or merge with or into, or convey, transfer or lease all or substantially all of our assets, to another entity. These covenants are subject to a number of limitations, exceptions and qualifications.

Cash Redemption at Our Option: Prior to February 15, 2017, we may redeem the 2022 Notes, in whole or in part, at a price equal to the principal amount of the 2022 Notes to be redeemed plus a make-whole premium as described in the indenture governing the 2022 Notes, together with accrued and unpaid interest. Additionally, 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 2022 Notes at a price equal to 105.875% of the principal amount together with accrued and unpaid interest. On or after February 15, 2017, we may redeem the 2022 Notes, in whole or in part, at prices above principal amount that decline over time, as specified in the indenture, together with accrued and unpaid interest.

MMJ Creditor Installment Payments

In October 2013, we made the first MMJ creditor installment payment of $534 million from funds that had been held in a current restricted cash account since the acquisition date. The remaining installment payments are due at the end of each calendar year from 2014 through 2019.

2043G Notes

In connection with the Exchange Transactions, on November 12, 2013, we issued $1.03 billion principal amount of the 2043G Notes. Each $1,000 principal amount at maturity had an original issue price of $800. An amount equal to the difference between the original issue price and the principal amount at maturity will accrete in accordance with a schedule set forth in the indenture.  The initial conversion rate for the 2043G Notes is 34.2936 shares of common stock per $1,000 principal amount at maturity, equivalent to an initial conversion price of approximately $29.16 per share of common stock.


15


Upon issuance of the 2043G Notes, we recorded $627 million of debt, $173 million of additional capital and $5 million of deferred debt issuance costs (included in other noncurrent assets). The amount recorded as debt was based on the fair value of the debt component as a standalone instrument and was determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance (Level 2 fair value measurements). We recorded a debt discount of $398 million for the difference between the debt recorded at inception and the principal amount at maturity. Holders of the 2043G Notes have the right to require us to repurchase all or a portion of their notes on November 15, 2028 at the accreted principal amount, which is scheduled to be $917 million at such date. We have the option to pay cash, issue shares of common stock or any combination thereof, for the aggregate amount due upon conversion. It is our current intent to settle in cash the principal amount of the 2043G Notes upon conversion. As a result, the dilutive effect of the 2043G Notes in earnings per share is computed under the treasury stock method.

Conversion Rights: Holders may convert their 2043G Notes under the following circumstances: (1) if the 2043G Notes are called for redemption; (2) during any calendar quarter if 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 (approximately $37.91 per share) of the 2043G Notes; (3) if the trading price of the 2043G Notes is less than 98% of the product of the closing price of our common stock and the conversion rate of the 2043G Notes during the periods specified in the indenture; (4) if specified distributions or corporate events occur, as set forth in the indenture; or (5) at any time after August 15, 2043.

Cash Redemption at Our Option: Prior to November 20, 2018, we may redeem for cash the 2043G Notes if the closing price of our common stock is more than 130% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending within five trading days prior to the date on which we provide notice of redemption. The redemption price would equal the principal amount at maturity plus accrued and unpaid interest. On or after November 20, 2018, we may redeem for cash the 2043G Notes without regard to the closing price of our common stock. The redemption price would equal the accreted principal amount plus accrued and unpaid interest. If we redeem the 2043G Notes prior to November 20, 2018, we are required to pay in cash a make-whole premium as specified in the indenture.

Cash Repurchase at the Option of the Holder: Holders of the 2043G Notes may require us to repurchase for cash all or a portion of the 2043G Notes on November 15, 2028. The repurchase price is equal to the accreted principal amount at such date plus accrued and unpaid interest. Holders of the 2043G Notes may also require us to repurchase for cash all or a portion of their 2043G Notes at a repurchase price equal to the accreted principal amount plus accrued and unpaid interest upon a change in control or a termination of trading, as defined in the indenture.

2019 Notes

On December 20, 2013, we issued $462 million in principal amount of 1.258% Secured Notes due January 2019 (the "2019 Notes"). The 2019 Notes mature on January 15, 2019 and are collateralized by certain equipment which had a carrying value of $215 million as of May 29, 2014. The principal amount of the 2019 Notes is payable in 10 consecutive semi-annual installments payable in January and July of each year, commencing in July 2014. The Export-Import Bank of the United States ("Ex-Im Bank") guaranteed payment of all regularly scheduled installment payments of principal of, and interest on, the 2019 Notes. We paid $23 million to Ex-Im Bank for its guarantee upon issuance of the 2019 Notes.

The 2019 Notes contains covenants which are customary for financings of this type, including negative covenants that limit or restrict our ability to create liens or dispose of the equipment securing the 2019 Notes. Events of default also include, among others, the occurrence of any event or circumstance that, in the reasonable judgment of Ex-Im Bank, is likely materially and adversely to affect our ability to perform any payment obligation, or any of our other material obligations under the indenture, the 2019 Notes or under any other related transaction documents to which Ex-Im Bank is a party.

Cash Redemption at Our Option: At any time prior to the maturity date of the 2019 Notes, we may redeem the 2019 Notes, in whole or in part, at a price equal to the principal amount of the 2019 Notes to be redeemed plus a make-whole premium as described in the indenture, together with accrued and unpaid interest.

Other Notes Payable

On February 27, 2014, in connection with our acquisition of an additional 9.9% interest in MMT, we recorded a $127 million note payable to the seller for the present value of the monthly installments, from March 2014 through December 2014.


16


Convertible Notes With Debt and Equity Components

Accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion require the debt and equity components to be separately accounted for in a manner that reflects a nonconvertible borrowing rate when interest expense is recognized in subsequent periods. The amount initially recorded as debt is based on the fair value of the debt component as a standalone instrument, determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings similar to ours at the time of issuance. The difference between the debt recorded at inception and its principal amount is accreted to principal through interest expense through the estimated life of the note.

The terms of certain of our convertible notes give holders the right to require us to repurchase all or a portion of their notes at a date or dates earlier than the contractual maturity of the notes or upon the occurrence of certain events or circumstances. In these cases, we amortize any initial debt discount or imputed interest over the period from issuance of the notes through the earliest date that holders can require us to repurchase all or a portion of their notes. As a result, the period of amortization can be significantly shorter than the contractual maturity. (See "Holder Put Date" in the table below.)

As of May 29, 2014, the trading price of our common stock was higher than the initial conversion prices of all of our outstanding convertible notes, except for the 2043G Notes. As a result, the conversion values were in excess of principal amounts for such notes. The following table summarizes certain features of our convertible notes as of May 29, 2014:

 
 
Holder Put Date
 
Outstanding Principal
 
Shares Issuable Upon Conversion
 
Initial Conversion Price Per Share
 
Conversion Price Per Share Threshold(1)
 
Conversion Value
in Excess of Principal(2)
2031B Notes
 
August 2020
 
$
114

 
12

 
$
9.50

 
$
12.35

 
$
229

2032C Notes
 
May 2019
 
390

 
41

 
9.63

 
12.52

 
769

2032D Notes
 
May 2021
 
374

 
37

 
9.98

 
12.97

 
696

2033E Notes
 
February 2018
 
300

 
27

 
10.93

 
14.21

 
484

2033F Notes
 
February 2020
 
300

 
27

 
10.93

 
14.21

 
484

2043G Notes(3)
 
November 2028
 
1,025

 
35

 
29.16

 
37.91

 
—

 
 
 
 
$
2,503

 
179

 
 
 
 
 
$
2,662

(1) 
Holders have the right to convert all or a portion of their notes at a date or dates earlier than 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 initial conversion price.
(2) 
Based on our closing share price of $28.58 as of May 29, 2014.
(3) 
The original principal amount of $820 million accretes up to $917 million in November 2028 and $1.03 billion at maturity in 2043.

Contractual Maturities

The table below sets forth the contractual maturities of the MMJ creditor installment payments, convertible notes and other notes payable:

As of
 
May 29,
2014
Remainder of 2014
 
$
106

2015
 
516

2016
 
441

2017
 
410

2018
 
609

2019 and thereafter
 
3,348

Discounts
 
(753
)
 
 
$
4,677



17



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.

Rambus

On May 5, 2004, Rambus, Inc. ("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.

We were engaged in litigation with Rambus relating to certain of Rambus' patents and certain of our claims and defenses. Our lawsuits with Rambus related to patent matters were 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.

In December 2013, we settled all pending litigation between us and Rambus, including all antitrust and patent matters.  We also entered into a 7-year term patent cross-license agreement with Rambus that allows us to avoid costs of patent-related litigation during the term.  We agreed to pay Rambus up to $10 million per quarter over seven years, for a total of $280 million, beginning in the second quarter of 2014.  The primary benefits we received from these arrangements were (1) the settlement and termination of all existing litigation, (2) the avoidance of future litigation expenses and (3) the avoidance of future management and customer disruptions.  As a result, other operating expense for the first quarter of 2014 included a $233 million charge to accrue a liability, which reflects the discounted value of amounts due under this arrangement.

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.

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, including MMJ and Elpida Memory (USA) Inc.  On August 22, 2013, the plaintiffs filed a third amended complaint. The third amended complaint alleges that certain of our DRAM and image sensor products infringe four U.S. patents and that certain MMJ and Elpida Memory (USA) Inc. DRAM products infringe two U.S. patents and seeks damages, attorneys' fees, and costs. Trial currently is scheduled for January 25, 2016. On March 23, 2012, MMJ and Elpida Memory (USA) Inc. filed a Notice of Filing and Hearing on Petition Under Chapter 15 of the U.S. Bankruptcy Code and Issuance of Provisional Relief that included an order of the U.S. Bankruptcy Court for the District of Delaware staying judicial proceedings against MMJ and Elpida Memory (USA) Inc. Accordingly, the plaintiffs' case against MMJ and Elpida Memory (USA) was stayed.  On June 25, 2013, the U.S. Bankruptcy Court for the District of Delaware entered its Order (1) Granting Recognition of the Japanese Reorganization Plan of MMJ and the Tokyo District Court's Confirmation Orders, (2) Entrusting MMJ's U.S. Assets to Foreign Representatives and Approving Certain Plan Transactions, (3) Granting Permanent Injunction, and (4) Granting Related Relief (the "Recognition Order").  Pursuant to the Recognition Order, the plaintiffs are permanently enjoined from continuing their case against MMJ and Elpida Memory (USA) Inc. in respect of any claim or claims arising prior to the commencement of the Japan Proceeding (as defined in the Recognition Order).


18


On December 5, 2011, the Board of Trustees for the University of Illinois (the "University") 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 Patent Trial and Appeal Board ("PTAB") held a hearing in connection with the three petitions on December 9, 2013. On March 10, 2014, the PTAB issued written decisions finding that each and every claim in the three patents in suit is invalid, and cancelled all claims. The University has appealed the PTAB rulings to the U.S. Court of Appeals for the Federal Circuit.

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 infringes a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs. Trial is currently scheduled for August 21, 2015.

On December 7, 2007, Tessera, Inc. filed a patent infringement against MMJ, Elpida Memory (USA) Inc., and numerous other defendants, in the United States District Court for the Eastern District of Texas. The complaint alleges that certain MMJ and Elpida Memory (USA) Inc. products infringe four U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs. Prior to answering the complaint, MMJ and Elpida Memory (USA) Inc. and other defendants filed motions to stay the case pending final resolution of a case before the International Trade Commission ("ITC") against MMJ and Elpida Memory (USA) Inc. and other respondents, alleging infringement of the same patents asserted in the Eastern District of Texas case (In The Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III), ITC No. 337-TA-630 (the "ITC Action")). On February 25, 2008, the Eastern District of Texas Court granted the defendants' motion to stay the action. On December 29, 2009, the ITC issued a Notice of Final Determination in the ITC Action finding no violation by MMJ and Elpida Memory (USA) Inc. Tessera, Inc. subsequently appealed the matter to the U.S. Court of Appeals for the Federal Circuit. On May 23, 2011, the Federal Circuit affirmed the ITC's Final Determination. The Eastern District of Texas case currently remains stayed by order of the Eastern District of Texas Court. Additionally, by operation of the Recognition Order, plaintiff in that action is permanently enjoined from continuing its case against MMJ and Elpida Memory (USA) in respect of any claim or claims arising prior to the commencement of the Japan Proceeding (as defined in the Recognition Order).

Among other things, the above lawsuits pertain to certain of our DDR, DDR2, DDR3, SDR SDRAM, PSRAM, RLDRAM, LPSDR, NAND Flash, image sensor products 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.

Antitrust Matters

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 were 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, we agreed to pay approximately $67 million in aggregate in three equal installments over a two-year period. We paid the full amount into an escrow account by the end of the first quarter of 2013 in accordance with the settlement agreement.


19


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 above discussion of the U.S. indirect purchaser cases. 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.

Securities Matters

On July 12, 2013, seven former shareholders of Elpida (now known as MMJ) filed a complaint against Messrs. Sakamoto, Adachi, Gomi, Shirai, Tsay-Jiu, Wataki, Kinoshita, and Takahasi in their capacity as members of the board of directors of MMJ as of February 2013. The complaint alleges that the defendants engaged in various acts and misrepresentations to hide the financial condition of MMJ and deceive shareholders prior to MMJ filing a petition for corporate reorganization on February 27, 2013. The plaintiffs seek joint and several damages equal to the market value of shares owned by each of the plaintiffs on February 23, 2013, along with attorneys' fees and interest. At a hearing on September 25, 2013, the plaintiffs withdrew the complaint against Mr. Tsay-Jiu.

We are unable to predict the outcome of this matter and therefore cannot estimate the range of possible loss.  The final resolution of this matter could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda AG ("Qimonda") insolvency proceedings, filed suit against Micron Technology, Inc. ("Micron Technology") 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") and seeks an order requiring us to retransfer 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 Technology 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 cancelled. 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 are in the process of submitting 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 equivalent 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 May 29, 2014, the Inotera Shares had a carrying value for purposes of our financial reporting of $381 million and a market value of $1.66 billion.


20


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 of the 2031B, 2033E and 2033F 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 (we could pay cash, shares of common stock or a combination thereof, at our option, for the remainder, if any, of our conversion obligation). Additionally, the 2031B, 2033E and 2033F Notes were convertible at the option of the holders as of May 29, 2014. Therefore, the 2031B, 2033E and 2033F Notes were classified as current debt and the aggregate difference of $88 million between the principal amount and the carrying value was classified as redeemable convertible notes in the mezzanine section of the accompanying consolidated balance sheet as of May 29, 2014. (See "Debt" note.)


Equity

Changes in the components of equity were as follows:

 
 
Nine Months Ended May 29, 2014
 
Nine Months Ended May 30, 2013
 
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
Beginning balance
 
$
9,142

 
$
864

 
$
10,006

 
$
7,700

 
$
717

 
$
8,417

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
1,895

 
33

 
1,928

 
(518
)
 
2

 
(516
)
Other comprehensive income (loss)
 
(19
)
 
—

 
(19
)
 
(11
)
 
1

 
(10
)
Comprehensive income (loss)
 
1,876

 
33

 
1,909

 
(529
)
 
3

 
(526
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Contribution from noncontrolling interests
 
—

 
59

 
59

 
—

 
11

 
11

Distributions to noncontrolling interests
 
—

 
(19
)
 
(19
)
 
—

 
(33
)
 
(33
)
Acquisition of noncontrolling interests in MMT
 
34

 
(180
)
 
(146
)
 
—

 
—

 
—

Capital and other transactions attributable to Micron
 
(1,112
)
 
—

 
(1,112
)
 
157

 
—

 
157

Ending balance
 
$
9,940

 
$
757

 
$
10,697

 
$
7,328

 
$
698

 
$
8,026


Micron Shareholders' Equity

Capped Calls

Issued and Outstanding Capped Calls: We have entered into a series of capped call transactions intended to reduce the effect of potential dilution upon conversion of our convertible notes which may be settled in shares or cash, at our election. The capped call transactions are considered capital transactions and the related cost was recorded as a charge to additional capital.

21



The following table presents information related to the issued and outstanding capped calls as of May 29, 2014.

Capped Calls
 

 
 
 
Strike Price
 
Cap Price Range
 
Underlying Common Shares
 
Value at Expiration(1)
 
Expiration Dates
 
 
Low
 
High
 
 
Minimum
 
Maximum
2031
 
Jul 2015
 -
Feb 2016
 
$
9.50

 
$
12.67

 
$
13.17

 
34

 
$
—

 
$
117

2032C
 
May 2016
 -
Nov 2017
 
9.80

 
14.26

 
15.69

 
56

 
—

 
307

2032D
 
Nov 2016
 -
May 2018
 
10.16

 
14.62

 
16.04

 
44

 
—

 
244

2033E
 
Jan 2018
 -
Feb 2018
 
10.93

 
14.51

 
14.51

 
27

 
—

 
98

2033F
 
Jan 2020
 -
Feb 2020
 
10.93

 
14.51

 
14.51

 
27

 
—

 
98

 
 
 
 
 
 
 
 
 
 
 
 
188

 
$
—

 
$
864

(1) 
Settlement in cash on the respective expiration dates would result in us receiving an amount ranging from zero, if the market price per share of our common stock is at or below the low strike price, to the maximum amount if the market price per share of our common stock is at or above the high cap price. If share settlement were elected, the number of shares received would be determined by the value of the capped calls at the time of settlement divided by the share price on the settlement date. Settlement of the capped calls prior to the expiration dates may be for an amount less than the maximum value at expiration.

Unwind of Capped Calls: In connection with the issuance in July 2011 of the 2031 Notes, we entered into capped call transactions (the "2031 Capped Calls"). In May 2014, we and the counterparties agreed to terminate and unwind a portion of our 2031 Capped Calls. We elected share settlement and received 3 million shares, equivalent to approximately $86 million based on the trading stock price at the time of the unwind, which were retired from treasury stock in the third quarter of 2014.

Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component for the first nine months of 2014 were as follows:

 
 
Cumulative Foreign Currency Translation Adjustments
 
Gains (Losses) on Derivative Instruments, Net
 
Gains (Losses) on Investments, Net
 
Pension Liability Adjustments
 
Total
Balance at August 29, 2013
 
$
44

 
$
21

 
$
—

 
$
(2
)
 
$
63

Other comprehensive income before reclassifications
 
(17
)
 
(2
)
 
5

 
1

 
(13
)
Amount reclassified out of accumulated other comprehensive income
 
—

 
(3
)
 
(3
)
 
1

 
(5
)
Tax effects
 
—

 
(1
)
 
—

 
—

 
(1
)
Other comprehensive income (loss)
 
(17
)
 
(6
)
 
2

 
2

 
(19
)
Balance at May 29, 2014
 
$
27

 
$
15

 
$
2

 
$
—

 
$
44



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Noncontrolling Interests in Subsidiaries

As of
 
May 29, 2014
 
August 29, 2013
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT(1)
 
$
650

 
49
%
 
$
601

 
49
%
MP Mask(1)
 
93

 
50
%
 
92

 
50
%
MMT
 
9

 
<1%

 
155

 
11
%
Other
 
5

 
Various

 
16

 
Various

 
 
$
757

 
 
 
$
864

 
 
(1) Entity is a variable interest entity.

IMFT

Since inception in 2006 through May 29, 2014, we have owned 51% of IMFT, a joint venture between us and Intel to manufacture NAND Flash memory products and 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 cumulative contributions to IMFT. The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights, commencing in January 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 to us, 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.

IMFT manufactures NAND Flash memory products using designs and technology we develop with Intel. We generally share with Intel the costs of product design, other NAND Flash R&D costs and R&D costs of certain emerging memory technologies. Our R&D expenses were reduced by reimbursements from Intel of $36 million and $100 million for the third quarter and first nine months of 2014, respectively, and $33 million and $99 million for the third quarter and first nine months of 2013, respectively.

We sell a portion of our products to Intel through our IMFT venture at long-term negotiated prices approximating cost. Sales of NAND Flash products to Intel under this arrangement were $107 million and $312 million for the third quarter and first nine months of 2014, respectively, and $89 million and $279 million for the third quarter and first nine months of 2013, respectively. Receivables from Intel for IMFT sales of NAND Flash products as of May 29, 2014 and August 29, 2013, were $66 million and $68 million, respectively.


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

As of
 
May 29,
2014
 
August 29,
2013
Assets
 
 
 
 
Cash and equivalents
 
$
84

 
$
62

Receivables
 
72

 
76

Inventories
 
50

 
49

Other current assets
 
4

 
4

Total current assets
 
210

 
191

Property, plant and equipment, net
 
1,463

 
1,382

Other noncurrent assets
 
47

 
46

Total assets
 
$
1,720

 
$
1,619

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
170

 
$
88

Deferred income
 
9

 
9

Equipment purchase contracts
 
8

 
78

Current debt
 
6

 
6

Total current liabilities
 
193

 
181

Long-term debt
 
8

 
13

Other noncurrent liabilities
 
112

 
118

Total liabilities
 
$
313

 
$
312

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

Our ability to access IMFT's cash and other assets through cash dividends, loans or advances, including 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.

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 29,
2014
 
May 30,
2013
 
May 29,
2014
 
May 30,
2013
IMFT distributions to Micron
 
$
—

 
$
34

 
$
10

 
$
34

IMFT distributions to Intel
 
—

 
33

 
10

 
33

Micron contributions to IMFT
 
10

 
2

 
61

 
12

Intel contributions to IMFT
 
10

 
1

 
59

 
11


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 May 29, 2014, we owned approximately 50% and Photronics owned approximately 50% of MP Mask. We purchase a substantial majority of the photomasks produced by MP Mask pursuant to a supply arrangement.


24


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

As of
 
May 29,
2014
 
August 29,
2013
Current assets
 
$
34

 
$
26

Noncurrent assets (primarily property, plant and equipment)
 
209

 
182

Current liabilities
 
46

 
25

Noncurrent liabilities
 
15

 
—

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

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

MMT

As of August 29, 2013, noncontrolling interests in MMT was 11%. In the second and third quarters of 2014, we purchased additional shares of MMT's outstanding common stock from the noncontrolling shareholders for $146 million, and as of May 29, 2014, noncontrolling interests in MMT were less than 1%. Substantially all of the MMT shares purchased in the second quarter of 2014 were financed with a short-term loan from a seller. (See "Debt – Other Notes Payable" note.) As a result of the purchases of MMT shares in the second and third quarters of 2014, in aggregate, noncontrolling interests decreased by $180 million and additional capital increased by $34 million.


Derivative Instruments

We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates and variable interest rates.  We also had convertible note settlement obligations which became derivative instruments as a result of our elections to settle conversions in cash. We do not use derivative instruments for speculative purposes.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives: We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from 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.

To hedge our exposures to monetary assets and liabilities, 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 or 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 measured at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2 fair value measurements). In connection with currency exchange rate risk associated with the MMJ Acquisition in July 2013, we entered into currency exchange transactions (the "MMJ Acquisition Hedges"). The MMJ Acquisition Hedges were not designated for hedge accounting and were remeasured at fair value each period. We recorded losses from the MMJ Acquisition Hedges of $47 million and $225 million in the third quarter and first nine months of 2013, respectively. To mitigate the risk of the yen strengthening against the U.S. dollar on 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.

Realized and unrealized gains and losses on currency derivatives without hedge accounting designation as well as the change in the underlying monetary assets and liabilities due to changes in currency exchange rates are included in other non-operating income (expense).


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Interest Rate Swaps: We are party to interest rate swap contracts that mature in August 2017 to hedge against the variability of future interest payments due on floating-rate debt, which effectively converts the floating-rate debt to fixed-rate debt. Our primary objective of entering into interest rate swap contracts is to reduce the volatility that changes in interest rates on floating-rate debt have on our earnings. As of May 29, 2014, the principle balance on the floating-rate debt was $254 million. We designated 80% of the swaps as cash flow hedges and the remaining 20% were not designated for hedge accounting treatment. The fair values of the interest rate swaps are calculated by discounting the expected future cash flows based on inputs that are readily available in publicly quoted markets (Level 2 fair value measurements). Changes in the fair value of the undesignated portion are included in interest expense.

Convertible Notes Settlement Obligations: In connection with our debt restructure activities in the first nine months of 2014, holders elected to convert substantially all of the outstanding 2014 Notes, 2027 Notes and 2031A Notes. As a result of our elections to settle the conversion amounts in cash, each of the settlement obligations became derivative debt liabilities subject to mark-to-market accounting treatment for a period of approximately 30 days, beginning on the date we notified the holder of our intention to settle the obligation in cash through the settlement date. The fair values of the underlying derivative settlement obligations were initially determined using the Black-Scholes option valuation model (Level 2 fair value measurements). The Black-Scholes model requires the input of assumptions, including the stock price, expected stock-price volatility, estimated option life, risk-free interest rate and dividend rate. The subsequent measurements and final settlement amounts of our convertible notes settlement obligations were based on the volume-weighted average stock price (Level 1 fair value measurements). Changes in fair values of the derivative settlement obligations were included in other non-operating income (expense), net.

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

 
 
Notional Amount
(in U.S. dollars)
 
Fair Value of
Current Assets(1)
 
Noncurrent Assets(2)
 
Current Liabilities(3)
 
Noncurrent Liabilities(4)
As of May 29, 2014
 
 
 
 
 
 
 
 
 
 
Currency forward contracts: