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EX-32.2 - EXHIBIT 32.2 - MICRON TECHNOLOGY INCexhibit_32-2.htm
EX-31.2 - EXHIBIT 31.2 - MICRON TECHNOLOGY INCexhibit_31-2.htm
EX-32.1 - EXHIBIT 32.1 - MICRON TECHNOLOGY INCexhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - MICRON TECHNOLOGY INCexhibit_31-1.htm
EX-10.88 - EXHIBIT 10.88 - MICRON TECHNOLOGY INCexhibit_10-88.htm
EX-10.87 - EXHIBIT 10.87 - MICRON TECHNOLOGY INCexhibit_10-87.htm
EX-10.89 - EXHIBIT 10.89 - MICRON TECHNOLOGY INCexhibit_10-89.htm





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

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 4, 2010

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
incorporation or organization)
Identification No.)
   
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 Web site, 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 o 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 definition 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 April 5, 2010 was 855,642,959.



 
 

 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

MICRON TECHNOLOGY, INC.

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

   
Quarter Ended
   
Six Months Ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
                         
Net sales
  $ 1,961     $ 993     $ 3,701     $ 2,395  
Cost of goods sold
    1,319       1,260       2,616       3,111  
Gross margin
    642       (267 )     1,085       (716 )
                                 
Selling, general and administrative
    100       90       197       192  
Research and development
    148       168       285       346  
Restructure
    (1 )     105       (2 )     39  
Goodwill impairment
    --       58       --       58  
Other operating (income) expense, net
    (20 )     21       (11 )     30  
Operating income (loss)
    415       (709 )     616       (1,381 )
                                 
Interest income
    2       4       4       14  
Interest expense
    (46 )     (47 )     (93 )     (88 )
Other non-operating income (expense), net
    (1 )     (1 )     55       (11 )
      370       (753 )     582       (1,466 )
                                 
Income tax (provision) benefit
    (4 )     (5 )     3       (18 )
Equity in net income (losses) of equity method investees, net of tax
    13       (56 )     (4 )     (61 )
Net income (loss)
    379       (814 )     581       (1,545 )
                                 
Net (income) loss attributable to noncontrolling interests
    (14 )     51       (12 )     64  
Net income (loss) attributable to Micron
  $ 365     $ (763 )   $ 569     $ (1,481 )
                                 
Earnings (loss) per share:
                               
Basic
  $ 0.43     $ (0.99 )   $ 0.67     $ (1.91 )
Diluted
    0.39       (0.99 )     0.61       (1.91 )
                                 
Number of shares used in per share calculations:
                               
Basic
    847.6       773.9       847.0       773.6  
Diluted
    1,005.3       773.9       1,003.1       773.6  







See accompanying notes to consolidated financial statements.

 
1

 


 

MICRON TECHNOLOGY, INC.

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

 
As of
 
March 4,
2010
   
September 3,
2009
 
             
Assets
           
Cash and equivalents
  $ 1,870     $ 1,485  
Receivables
    1,072       798  
Inventories
    1,075       987  
Other current assets
    72       74  
Total current assets
    4,089       3,344  
Intangible assets, net
    322       344  
Property, plant and equipment, net
    6,525       7,089  
Equity method investments
    592       315  
Other assets
    424       367  
Total assets
  $ 11,952     $ 11,459  
                 
Liabilities and equity
               
Accounts payable and accrued expenses
  $ 1,040     $ 1,037  
Deferred income
    216       209  
Equipment purchase contracts
    266       222  
Current portion of long-term debt
    725       424  
Total current liabilities
    2,247       1,892  
Long-term debt
    1,994       2,379  
Other liabilities
    293       249  
Total liabilities
    4,534       4,520  
                 
Commitments and contingencies
               
                 
Micron shareholders’ equity:
               
Common stock, $0.10 par value, authorized 3,000 million shares, issued and outstanding 855.5 million and 848.7 million shares, respectively
    86       85  
Additional capital
    7,320       7,257  
Accumulated deficit
    (1,816 )     (2,385 )
Accumulated other comprehensive income (loss)
    12       (4 )
Total Micron shareholders’ equity
    5,602       4,953  
Noncontrolling interests in subsidiaries
    1,816       1,986  
Total equity
    7,418       6,939  
Total liabilities and equity
  $ 11,952     $ 11,459  













See accompanying notes to consolidated financial statements.

 
2

 

MICRON TECHNOLOGY, INC.

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

Six months ended
 
March 4,
2010
   
March 5,
2009
 
             
Cash flows from operating activities
           
Net income (loss)
  $ 581     $ (1,545 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    977       1,157  
Share-based compensation
    53       22  
Provision to write down inventories to estimated market values
    14       603  
Equity in net losses of equity method investees
    4       61  
Gain from Inotera stock issuance
    (56 )     --  
(Gain) loss from disposition of equipment, net
    (9 )     43  
Noncash restructure charges (credits)
    (8 )     149  
Goodwill impairment
    --       58  
Change in operating assets and liabilities:
               
(Increase) decrease in receivables
    (310 )     374  
Increase in customer prepayments
    (103 )     (43 )
Increase in inventories
    (102 )     (171 )
Increase (decrease) in accounts payable and accrued expenses
    66       (102 )
Increase in deferred income
    5       83  
Other
    18       9  
Net cash provided by operating activities
    1,130       698  
                 
Cash flows from investing activities
               
Expenditures for property, plant and equipment
    (155 )     (375 )
Acquisitions of equity method investments
    (143 )     (408 )
Increase in restricted cash
    (29 )     (27 )
Proceeds from sales of property, plant and equipment
    36       8  
Proceeds from maturities of available-for-sale securities
    --       130  
Other
    28       54  
Net cash used for investing activities
    (263 )     (618 )
                 
Cash flows from financing activities
               
Repayments of debt
    (370 )     (234 )
Distributions to noncontrolling interests
    (172 )     (468 )
Payments on equipment purchase contracts
    (136 )     (98 )
Proceeds from debt
    200       382  
Cash received from noncontrolling interests
    --       24  
Other
    (4 )     3  
Net cash used for financing activities
    (482 )     (391 )
                 
Net increase (decrease) in cash and equivalents
    385       (311 )
Cash and equivalents at beginning of period
    1,485       1,243  
Cash and equivalents at end of period
  $ 1,870     $ 932  
                 
Supplemental disclosures
               
Income taxes refunded (paid), net
  $ 1     $ (11 )
Interest paid, net of amounts capitalized
    (51 )     (46 )
Noncash investing and financing activities:
               
Equipment acquisitions on contracts payable and capital leases
    232       175  
      Acquisition of interest in Transform
    65       --  

See accompanying notes to consolidated financial statements.

 
3

 

MICRON TECHNOLOGY, INC.

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

Business and Significant Accounting Policies

Basis of presentation:  Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as the “Company”) is a global manufacturer and marketer of semiconductor devices, principally DRAM and NAND Flash memory products.  In addition, the Company manufactures semiconductor components for CMOS image sensors and other semiconductor products.  The primary products of the Company’s reportable segment, Memory, are DRAM and NAND Flash memory products.  The accompanying consolidated financial statements include the accounts of the Company 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 the Company’s Annual Report on Form 10-K for the year ended September 3, 2009, except for changes resulting from the adoption of new accounting standards for convertible debt and noncontrolling interests.  Prior year amounts and balances have been retrospectively adjusted to reflect the adoption of these new accounting standards.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows.  (See “Adjustment for Retrospective Application of New Accounting Standards” note.)

The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s fiscal 2010 contains 52 weeks and the second quarter and first six months of fiscal 2010, which ended on March 4, 2010, contained 13 weeks and 26 weeks, respectively.  The Company’s fiscal 2009, which ended on September 3, 2009, contained 53 weeks and the second quarter and first six months of fiscal 2009 contained 13 weeks and 27 weeks, respectively.  All period references are to the Company’s fiscal periods unless otherwise indicated.  These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended September 3, 2009 and in the Company’s Form 8-K filed on March 4, 2010.

Recently adopted accounting standards:  In May 2008, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement.  This standard requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components of such instruments in a manner such that interest cost is recognized at the entity’s nonconvertible debt borrowing rate in subsequent periods.  The Company adopted this standard as of the beginning of 2010 and retrospectively accounted for its $1.3 billion of 1.875% convertible senior notes under the provisions of this guidance from the May 2007 issuance date of the notes.  As a result, prior financial statement amounts were recast.  (See “Adjustment for Retrospective Application of New Accounting Standards” note.)

In December 2007, the FASB issued a new accounting standard on noncontrolling interests in consolidated financial statements.  This standard requires that (1) noncontrolling interests be reported as a separate component of equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the statement of operations, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  The Company adopted this standard as of the beginning of 2010.  As a result, prior financial statement amounts were recast.  (See “Adjustment for Retrospective Application of New Accounting Standards” note.)

In December 2007, the FASB issued a new accounting standard on business combinations, which establishes the principles and requirements for how an acquirer (1) recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase and (3) determines what information to disclose.  The Company adopted this standard effective as of the beginning of 2010.  The adoption did not have a significant impact on the Company’s financial statements.

In September 2006, the FASB issued a new accounting standard on fair value measurements and disclosures, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  The Company adopted this standard effective as of the beginning of 2009 for financial assets and financial liabilities.  The Company adopted this standard effective as of the beginning of 2010 for all other assets and liabilities.  The adoptions did not have a significant impact on the Company’s financial statements.
 
4

 

Recently issued accounting standards:  In June 2009, the FASB issued a new accounting standard on variable interest entities which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities.  The Company is required to adopt this standard as of the beginning of 2011.  The Company is evaluating the impact the adoption of this standard will have on its financial statements.


Supplemental Balance Sheet Information

Receivables
 
March 4,
2010
   
September 3,
2009
 
             
Trade receivables (net of allowance for doubtful accounts of $5 million and $5 million, respectively)
  $ 880     $ 591  
Related party receivables
    55       70  
Income and other taxes
    82       49  
Other
    55       88  
    $ 1,072     $ 798  

As of March 4, 2010, related party receivables included $52 million due from Aptina Imaging Corporation under a wafer supply agreement, $2 million due from Transform Solar Pty Limited for transition services and photovoltaic product development activities, and $1 million due from Inotera Memories, Inc. for reimbursement of expenses incurred under a technology transfer agreement.  As of September 3, 2009, related party receivables included $69 million due from Aptina Imaging Corporation under a wafer supply agreement for image sensor products and $1 million due from Inotera Memories, Inc. for reimbursement of expenses incurred under a technology transfer agreement.

As of March 4, 2010 and September 3, 2009, other receivables included $33 million and $29 million, respectively, due from Intel Corporation for amounts related to NAND Flash product design and process development activities.

Inventories
 
March 4,
2010
   
September 3,
2009
 
             
Finished goods
  $ 302     $ 233  
Work in process
    666       649  
Raw materials and supplies
    107       105  
    $ 1,075     $ 987  

The Company’s results of operations for the second and first quarters of 2009 included charges of $234 million and $369 million, respectively, to write down the carrying value of work in process and finished goods inventories of memory products (both DRAM and NAND Flash) to their estimated market values.

Intangible Assets
                       
                         
   
March 4, 2010
   
September 3, 2009
 
   
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
                         
Product and process technology
  $ 407     $ (161 )   $ 439     $ (181 )
Customer relationships
    127       (58 )     127       (50 )
Other
    28       (21 )     28       (19 )
    $ 562     $ (240 )   $ 594     $ (250 )

During the first six months of 2010 and 2009, the Company capitalized $15 million and $58 million, respectively, for product and process technology with weighted-average useful lives of 10 years.
 
5

 

Amortization expense for intangible assets was $17 million and $34 million for the second quarter and first six months of 2010, respectively, and $18 million and $40 million for the second quarter and first six months of 2009, respectively.  Annual amortization expense for intangible assets is estimated to be $67 million for 2010, $63 million for 2011, $56 million for 2012, $51 million for 2013 and $43 million for 2014.

Property, Plant and Equipment
 
March 4,
2010
   
September 3,
2009
 
             
Land
  $ 95     $ 96  
Buildings
    4,308       4,473  
Equipment
    12,244       11,834  
Construction in progress
    55       47  
Software
    269       268  
      16,971       16,718  
Accumulated depreciation
    (10,446 )     (9,629 )
    $ 6,525     $ 7,089  

Depreciation expense was $449 million and $903 million for the second quarter and first six months of 2010, respectively, and $515 million and $1,084 million for the second quarter and first six months of 2009, respectively.

The Company, through its IM Flash joint venture, has an unequipped wafer fabrication facility in Singapore that had been idle through the first quarter of 2010 since its construction was completed in the first quarter of 2009.  The Company has been recording depreciation expense for the facility since its completion and its net book value was $609 million as of March 4, 2010.  In the second quarter of 2010, IM Flash began moving forward with start-up activities at the Singapore wafer fabrication facility, including placing purchase orders and preparing the facility for tool installations that will commence in 2011.

As of March 4, 2010 and September 3, 2009, other noncurrent assets included $70 million and $81 million, respectively, for buildings and equipment classified as held for sale.

As part of restructure plans that were initiated in 2009 to shut down 200mm manufacturing operations at its Boise, Idaho facilities, the Company recorded impairment charges related to equipment of $87 million and $143 million for the second quarter and first six months of 2009, respectively.

Goodwill

In the second quarter of 2009, the Company’s imaging operations (then the primary component of All Other segments) experienced a severe decline in sales, margins and profitability due to a significant decline in demand as a result of the downturn in global economic conditions.  The drop in market demand resulted in significant declines in average selling prices and unit sales.  Due to these market and economic conditions, the Company’s imaging operations and its competitors experienced significant declines in market value.  Accordingly, in the second quarter of 2009, the Company performed an assessment of its imaging operations segment goodwill for impairment.  Based on this assessment, the Company wrote off all of the $58 million of goodwill associated with its imaging operations as of March 5, 2009.

Equity Method Investments
                       
                         
   
March 4, 2010
   
September 3, 2009
 
   
Carrying Value
   
Ownership Percentage
   
Carrying Value
   
Ownership Percentage
 
                         
Inotera
  $ 438       29.9 %   $ 229       29.8 %
Transform
    70       50.0 %     --       --  
MeiYa
    43       50.0 %     42       50.0 %
Aptina
    41       35.0 %     44       35.0 %
    $ 592             $ 315          


 
6

 


 
The Company has partnered with Nanya Technology Corporation (“Nanya”) in two Taiwan DRAM memory companies, Inotera Memories, Inc. (“Inotera”) and MeiYa Technology Corporation (“MeiYa”), which are accounted for as equity method investments.  Additionally, the Company has equity method investments in Aptina Imaging Corporation (“Aptina”), a CMOS imaging company, and in Transform Solar Pty Limited (“Transform”), a joint venture to develop and manufacture photovoltaic products.

DRAM joint ventures with Nanya:  The Company has a partnering arrangement with Nanya pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products.  In addition, the Company has deployed and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya.  As a result, the Company expects to receive an aggregate of $207 million from Nanya for products manufactured on 68nm and 50nm technologies through the third quarter of 2010.  Subsequent to Nanya’s payment of the $207 million, the Company and Nanya will share equally in DRAM development costs.  The Company recognized $26 million and $52 million, respectively, of license revenue in net sales from this agreement during the second quarter and first six months of 2010, respectively, and recognized $26 million and $54 million from this agreement during the second quarter and first six months of 2009, respectively.  The Company has recognized $194 million of cumulative license revenue from this agreement from May 2008 through March 4, 2010.  In addition, the Company may receive royalties in future periods from Nanya for sales stack DRAM products manufactured by or for Nanya.

The Company has concluded that both Inotera and MeiYa are variable interest entities because of the Inotera and MeiYa supply agreements with the Company and Nanya.  Nanya and the Company are considered related parties under the accounting standards for consolidating variable interest entities.  The Company reviewed several factors to determine whether it is the primary beneficiary of Inotera and MeiYa, including the size and nature of the entities’ operations relative to Nanya and the Company, nature of the day-to-day operations and certain other factors.  Based on those factors, the Company determined that Nanya is more closely associated with, and therefore the primary beneficiary of, Inotera and MeiYa.  The Company accounts for its interests using the equity method of accounting and does not consolidate these entities.  The Company recognizes its share of earnings or losses from these entities on a two-month lag.

Inotera:  In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a publicly-traded entity in Taiwan, from Qimonda AG (“Qimonda”).  On August 3, 2009, Inotera sold 640 million common shares in a public offering at a price equal to 16.02 New Taiwan dollars per common share (approximately $0.49 U.S. dollars on August 3, 2009).  As a result of the share issuance, the Company’s interest in Inotera decreased from 35.5% to 29.8% and the Company recognized a gain of $56 million in the first quarter of 2010.  On February 6, 2010, as part of another offering of 640 million common shares, the Company and Nanya each paid $138 million to purchase approximately 196 million, slightly increasing the Company’s interest in Inotera from 29.8% to 29.9%.  As of March 4, 2010, the ownership of Inotera was held 30.0% by Nanya, 29.9% by the Company and the balance was publicly held.

The proportionate share of Inotera’s shareholders’ equity that the Company acquired in the first quarter of 2009 was higher than the Company’s initial carrying value for Inotera.  This difference is being amortized as a credit to earnings in the Company’s statement of operations through equity in net income (losses) of equity method investees (the “Inotera Amortization”).  The $56 million gain recognized in the first quarter of 2010 on Inotera’s issuance of shares included $33 million of accelerated Inotera Amortization.  As of March 4, 2010, $152 million of Inotera Amortization remained to be recognized over a weighted-average period of 4.1 years.

In connection with the Company’s initial acquisition of shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the “Inotera Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya.  The cost to the Company of wafers purchased under the Inotera Supply Agreement is based on a margin sharing formula among the Company, Nanya and Inotera.  Under such formula, all parties’ manufacturing costs related to wafers supplied by Inotera, as well as the Company’s and Nanya’s selling prices for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers from Inotera.  The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity.  In the second quarter and first six months of 2010, the Company purchased $187 million and $355 million, respectively, of trench DRAM products from Inotera under the Inotera Supply Agreement.


 
7

 


 
During the second quarter of 2009, Qimonda filed for bankruptcy and defaulted on its obligations to purchase trench DRAM products from Inotera under a separate supply agreement between Inotera and Qimonda (“the Qimonda Supply Agreement”).  Pursuant to the Company’s obligations under the Inotera Supply Agreement, the Company’s purchase obligation includes purchasing Inotera’s trench DRAM capacity, less any trench DRAM products sold to Qimonda pursuant to the Qimonda Supply Agreement.  Pursuant to the Inotera Supply Agreement, the Company recorded $51 million in cost of goods sold in the second quarter of 2009 for its obligations to Inotera as a result of Qimonda’s default.

The Company’s results of operations for the second quarter and first six months of 2010 include gains of $15 million and $1 million, respectively, for its share of Inotera’s results of operations for the three and six-month period ended December 31, 2009, respectively.  The Company’s share of Inotera’s income (loss) for the second quarter and first six months of 2010 include $12 million and $26 million, respectively, of Inotera Amortization.  The Company’s results of operations for the second quarter of 2009 include losses of $56 million for its share of Inotera’s results of operations for the three-month period ended December 31, 2008 and are net of $8 million of Inotera Amortization.  During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement, and in connection therewith, recognized $5 million and $11 million of revenue in the second quarter and first six months of 2010, respectively.  As of March 4, 2010, unrecognized license fee revenue of $3 million related to the technology transfer fee will be recognized through the third quarter of 2010.

During the second quarter and first six months of 2010, the Company recorded a gain of $3 million and $10 million to other comprehensive income (loss), respectively, for cumulative translation adjustments on its investment in Inotera and recorded a gain of $1 million for the second quarter 2009.  As of March 4, 2010, the Company had a gain of $7 million in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets for cumulative translation adjustments on its investment in Inotera.  Based on the closing trading price of Inotera’s shares in an active market on March 4, 2010, the market value of the Company’s shares in Inotera was $1,006 million.

As of March 4, 2010, the Company’s maximum exposure to loss on its investment in Inotera equaled the $431 million recorded in the Company’s consolidated balance sheet for its investment in Inotera (which includes the $7 million gain in accumulated other comprehensive income (loss)).  The Company may also incur losses in connection with its obligations under the Inotera Supply Agreement to purchase up to 50% of Inotera’s wafer production under a long-term pricing arrangement.

MeiYa:  The Company and Nanya formed MeiYa in the fourth quarter of 2008.  In connection with the purchase of its ownership interest in Inotera, the Company entered into a series of agreements with Nanya pursuant to which both parties ceased future funding of, and resource commitments to, MeiYa.  In addition, MeiYa has sold substantially all of its assets to Inotera.  As of March 4, 2010, the ownership of MeiYa was held 50% by Nanya and 50% by the Company.  The Company’s results of operations for the second quarter and first six months of 2010 include a de minimis amount of income (loss) for its share of MeiYa’s results of operations for the three and six-month period ended December 31, 2009.  The Company’s results of operations for the second quarter and first six months of 2009 include losses of $3 million and $5 million, respectively, for its share of MeiYa’s results of operations for the three and six-month period ended December 31, 2008, respectively.  In the first six months of 2010, the Company recorded gains of $1 million in other comprehensive income for cumulative translation adjustments on its investment in MeiYa and recorded a loss of $5 million for the second quarter 2009.  As of March 4, 2010, the Company had $(5) million in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheet for cumulative translation adjustments on its investment in MeiYa.

As of March 4, 2010, the Company’s maximum exposure to loss on its MeiYa investment equaled the $48 million recorded in the Company’s consolidated balance sheet for its investment in MeiYa (which includes the $(5) million loss in accumulated other comprehensive income (loss)).

Aptina:  In the fourth quarter of 2009, the Company sold a 65% interest in Aptina, previously a wholly-owned subsidiary, to Acquisition L.P. (owned primarily by Riverwood Capital LLC and TPG Partners VI, L.P.).  A portion of the 65% interest held by Acquisition L.P. is in the form of convertible preferred shares that have a liquidation preference over the common shares.  As a result, the Company’s interest represented 64% of Aptina’s common stock, and Acquisition L.P. held 36% of Aptina’s common stock as of March 4, 2010.  The Company’s results of operations for the second quarter and first six months of 2010 include losses of $2 million and $5 million, respectively, for its share of Aptina’s results of operations for the three and six-month period ended January 7, 2010.

The Company manufactures imaging products for Aptina under a wafer supply agreement.  In the second quarter and first six months of 2010, the Company recognized $80 million and $188 million, respectively, of sales and $86 million and $194 million, respectively, of cost of goods sold from products sold to Aptina.
 
8

 

Transform: On December 18, 2009, the Company acquired a 50% interest in Transform, a subsidiary of Origin Energy Limited (“Origin”), which is a public company in Australia.  In exchange for its interest in Transform, the Company contributed nonmonetary assets from its Memory segment with a fair value of $65 million, consisting of manufacturing facilities, equipment, intellectual property and a fully paid lease to a portion of its Boise, Idaho manufacturing facilities.  The carrying value of the nonmonetary assets was approximately equal to the Company’s interest in Transform and no gain or loss was recognized on the contribution.  As of March 4, 2010, the ownership of Transform was held 50% by the Company and 50% by Origin.  During the second quarter of 2010, the Company and Origin also each contributed $5 million of cash to Transform.  The Company will recognize its share of Transform’s operating results on a two-month lag beginning in the third quarter of 2010.

As of March 4, 2010, other noncurrent assets included $35 million for the manufacturing facilities leased to Transform and liabilities included $35 million for deferred rent revenue on the fully paid lease.  Additionally, as of March 4, 2010, other noncurrent assets and liabilities included $6 million for the value of certain equipment and intangible assets, which the Company was obligated to contribute to Transform.

The Company has concluded that Transform is a variable interest entity because the Company’s equity investment at risk is not sufficient to permit Transform to finance its activities without additional subordinated financial support from its investors.  Origin and the Company are considered related parties under the accounting standards for consolidating variable interest entities.  The Company reviewed several factors to determine whether it is the primary beneficiary of Transform, including the relationships and significance of Transform’s activities and operations relative to Origin and the Company and certain other factors.  Based on those factors, the Company determined that Origin is more closely associated with, and therefore the primary beneficiary of, Transform.  The Company accounts for its interest using the equity method of accounting and does not consolidate the entity.

As of March 4, 2010, the Company’s maximum exposure loss on its investment in Transform equaled $70 million.

Accounts Payable and Accrued Expenses
 
March 4,
2010
   
September 3,
2009
 
             
Accounts payable
  $ 542     $ 526  
Salaries, wages and benefits
    186       147  
Related party payables
    128       83  
Customer advances
    47       150  
Income and other taxes
    42       32  
Other
    95       99  
    $ 1,040     $ 1,037  

Related party payables consisted of amounts primarily due to Inotera under the Inotera Supply Agreement, consisting of $127 million and $51 million as of March 4, 2010 and September 3, 2009, respectively, for the purchase of trench DRAM products and $32 million as of September 3, 2009 for underutilized capacity.  (See “Equity Method Investments – DRAM joint ventures with Nanya – Inotera” note.)

As of March 4, 2010 and September 3, 2009, customer advances included $33 million and $142 million, respectively, for the Company’s obligation to provide certain NAND Flash memory products to Apple Computer, Inc. (“Apple”) through December 31, 2010 pursuant to a prepaid NAND Flash supply agreement.  As of March 4, 2010 and September 3, 2009, other accounts payable and accrued expenses included $17 million and $24 million, respectively, for amounts due to Intel for NAND Flash product design and process development and licensing fees pursuant to a product designs development agreement.

 
9

 


 

Debt
 
March 4,
2010
   
September 3,
2009
 
             
Convertible senior notes, stated interest rate of 1.875%, effective interest rate of 7.9%, net of discount of $269 million and $295 million, respectively, due June 2014
  $ 1,031     $ 1,005  
Capital lease obligations, weighted-average imputed interest rates of 6.7%, due in monthly installments through February 2023
    537       559  
TECH credit facility, effective interest rate of 3.9% and 3.6% , respectively, net of discount of $3 million and $2 million, respectively, due in periodic installments through May 2012
    447       548  
Convertible senior notes, interest rate of 4.25%, due October 2013
    230       230  
EDB notes, denominated in Singapore dollars, interest rate of 5.4%, due February 2012
    214       208  
Mai-Liao Power note, stated interest rate of 2.3% and 2.4%, respectively, effective imputed interest rate of 12.1%, net of discount of $11 million and $18 million, respectively, due November 2010
    189       182  
Convertible subordinated notes, interest rate of 5.6%, due April 2010
    70       70  
Other notes
    1       1  
      2,719       2,803  
Less current portion
    (725 )     (424 )
    $ 1,994     $ 2,379  

In the first quarter of 2010, the Company adopted a new accounting standard for certain convertible debt.  The new standard was applicable to the Company’s 1.875% convertible senior notes with an aggregate principal amount of $1.3 billion issued in May 2007 (the “Convertible Notes”) and required the liability and equity components of the Convertible Notes to be accounted for separately.  (See “Adjustment for Retrospective Application of New Accounting Standards” note.)

The TECH credit facility is collateralized by substantially all of the assets of TECH (approximately $1,619 million as of March 4, 2010) and contains covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios, and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets.  In the first quarter of 2010, the covenants were modified and as of March 4, 2010, TECH was in compliance with the covenants.  In connection with the modification, the Company had guaranteed approximately 87% of the outstanding amount borrowed under TECH’s credit facility as of March 4, 2010 and its guarantee will increase to 100% on April 11, 2010.  Under the terms of the credit facility, TECH had $60 million in restricted cash as of March 4, 2010.

In the second quarter of 2010, the Company recorded $35 million in capital lease obligations with a weighted-average imputed interest rate of 6.9%, payable in periodic installments through February 2014.  As of March 4, 2010, $38 million of the Company’s total capital lease obligations contained covenants that require minimum levels of tangible net worth, cash and investments, and restricted cash of $23 million.  The Company was in compliance with these covenants as of March 4, 2010.

In the first quarter of 2010, the Company’s note with Nan Ya Plastics was replaced with a note to Mai-Liao Power Corporation, an affiliate of Nan Ya Plastics.  Nan Ya Plastics and Mai-Liao Power Corporation are subsidiaries of Formosa Plastics Corporation.  The note to Mai-Liao Power Corporation has the same terms and remaining maturity as the previous note to Nan Ya Plastics.  The Company’s note to Mai-Liao Power Corporation is guaranteed by the Company and collateralized by a first-priority security interest in certain of the Inotera shares owned by the Company aggregating to a maximum market value of $250 million.  Based on Inotera’s share price as of March 4, 2010 and the number of shares underlying the guarantee, the carrying value of the collateral was $109 million.  (See “Equity Method Investments – DRAM joint ventures with Nanya – Inotera” note.)

Contingencies

The Company has 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.  The Company is currently a party to other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s business, results of operations or financial condition.

 
10

 
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it 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 the Company’s obligations and the unique facts and circumstances involved in each particular agreement.  Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s business, results of operations or financial condition.

The Company is involved in the following antitrust, patent and securities matters.

Antitrust matters:  On May 5, 2004, Rambus, Inc. (“Rambus”) filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers alleging that the defendants harmed Rambus by engaging in concerted and unlawful efforts affecting Rambus DRAM (“RDRAM”) by eliminating competition and stifling innovation in the market for computer memory technology and computer memory chips.  Rambus’s complaint alleges 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 alleges that it is entitled to actual damages of more than a billion dollars and seeks joint and several liability, treble damages, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys’ fees and costs.  A trial date has not yet been scheduled.

At least sixty-eight purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging price-fixing in violation of federal and state antitrust laws, violations of state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002.  The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings.  On January 29, 2008, the Northern District of California court granted in part and denied in part the Company’s motion to dismiss plaintiffs’ second amended consolidated complaint.  Plaintiffs subsequently filed a motion seeking certification for interlocutory appeal of the decision.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit agreed to consider plaintiffs’ interlocutory appeal.

In addition, various states, through their Attorneys General, have filed suit against the Company and other DRAM manufacturers.  On July 14, 2006, and on September 8, 2006 in an amended complaint, the following Attorneys General filed suit in the U.S. District Court for the Northern District of California:  Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.  Thereafter, three states, Ohio, New Hampshire, and Texas, voluntarily dismissed their claims.  The remaining states filed a third amended complaint on October 1, 2007.  Alaska, Delaware, Kentucky, and Vermont subsequently voluntarily dismissed their claims.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks joint and several damages, trebled, as well as injunctive and other relief.  Additionally, on July 13, 2006, the State of New York filed a similar suit in the U.S. District Court for the Southern District of New York.  That case was subsequently transferred to the U.S. District Court for the Northern District of California for pre-trial purposes.  The State of New York filed an amended complaint on October 1, 2007.  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.

Three purported class action DRAM lawsuits also have been filed against the Company in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act.  The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States.  Plaintiffs’ motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively.  Plaintiffs subsequently filed an appeal of each of those decisions.  On November 12, 2009, the British Columbia Court of Appeal reversed the denial of class certification and remanded the case for further proceedings.  The appeal of the Quebec case is still pending.


 
11

 


 
In February and March 2007, All American Semiconductor, Inc., Jaco Electronics, Inc., and the DRAM Claims Liquidation Trust each filed suit against the Company and other DRAM suppliers in the U.S. District Court for the Northern District of California after opting-out of a direct purchaser class action suit that was settled.  The complaints allege, among other things, violations of federal and state antitrust and competition laws in the DRAM industry, and seek joint and several damages, trebled, as well as restitution, attorneys’ fees, costs and injunctive relief.

Three purported class action lawsuits alleging price-fixing of SRAM products have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased SRAM products directly or indirectly from various SRAM suppliers.

In addition, three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.

The Company is unable to predict the outcome of these lawsuits and therefore cannot estimate the range of possible loss.  The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

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 the Company’s products or manufacturing processes infringe their intellectual property rights.  In this regard, the Company is engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of the Company’s claims and defenses.  Lawsuits between Rambus and the Company are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy.  On January 9, 2009, the Delaware Court entered an opinion in favor of the Company holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company.  Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit.  That appeal is pending.  In the U.S. District Court for the Northern District of California, trial on a patent phase of the case has been stayed pending resolution of Rambus' appeal of the Delaware spoliation decision or further order of the California Court.

On March 6, 2009, Panavision Imaging, LLC filed suit against the Company and Aptina Imaging Corporation, then a wholly-owned subsidiary of the Company (“Aptina”), in the U.S. District Court for the Central District of California.  The complaint alleges that certain of the Company and Aptina’s image sensor products infringe four Panavision Imaging U.S. patents and seeks injunctive relief, damages, attorneys’ fees, and costs.

On December 11, 2009, Ring Technology Enterprises of Texas LLC filed suit against the Company in the U.S. District Court for the Eastern District of Texas alleging that certain of the Company’s memory products infringe one Ring Technology U.S. patent.  The complaint seeks injunctive relief, damages, attorneys’ fees, and costs.

Among other things, the above lawsuits pertain to certain of the Company’s SDRAM, DDR SDRAM, DDR2 SDRAM, DDR3 SDRAM, RLDRAM and image sensor products, which account for a significant portion of net sales.

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

Securities matters:  On February 24, 2006, a putative class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  Four substantially similar complaints subsequently were filed in the same Court.  The cases purport to be brought on behalf of a class of purchasers of the Company’s stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct.  The complaint seeks unspecified damages, interest, attorneys’ fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of the Company’s stock during the period from February 24, 2001 to September 18, 2002.
 
12

 

The Company is unable to predict the outcome of these cases and therefore cannot estimate the range of possible loss.  A court determination in any of these actions against the Company could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.


Adjustment for Retrospective Application of New Accounting Standards

Effective at the beginning of 2010, the Company adopted new accounting standards for noncontrolling interests and certain convertible debt instruments.  These new accounting standards required retrospective application and the Company’s financial statements contained herein have been adjusted to reflect the impact of adopting these new accounting standards.  The impact of the retrospective adoption is summarized below.

Noncontrolling interests in subsidiaries:  Under the new standard, noncontrolling interests in subsidiaries is (1) reported as a separate component of equity in the consolidated balance sheets and  (2) included in net income in the statement of operations.

Convertible debt instruments:  The new standard applies to convertible debt instruments that may be fully or partially settled in cash upon conversion and is applicable to the Company’s 1.875% convertible senior notes with an aggregate principal amount of $1.3 billion issued in May 2007 (the “Convertible Notes”).  The standard requires the liability and equity components of convertible notes to be accounted for separately.  The liability component recognized at the issuance of convertible notes equals the estimated fair value of a similar liability without a conversion option and the remainder of the proceeds received at issuance is allocated to equity.  In subsequent periods, the liability component recognized at issuance is increased to the principal amount of convertible notes through the amortization of interest costs.  In connection therewith, at the May 2007 issuance of the Convertible Notes there was a $402 million decrease in debt, a $394 million increase in additional capital, and an $8 million decrease in deferred debt issuance costs (included in other noncurrent assets).  Through 2009, $107 million of interest was amortized.  Information related to equity and debt components is as follows:

As of
 
March 4,
2010
   
September 3,
2009
 
             
Principal amount of the Convertible Notes
  $ 1,300     $ 1,300  
Unamortized discount
    269       295  
Carrying amount of the Convertible Notes
  $ 1,031     $ 1,005  
                 
Carrying amount of the equity component
  $ 394     $ 394  

The unamortized discount as of March 4, 2010, will be recognized as interest expense over approximately 4.3 years through June 2014, the maturity date of the Convertible Notes.

Information related to interest rates and expenses is as follows:

   
Quarter Ended
   
Six Months Ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Effective interest rate
    7.9 %     7.9 %     7.9 %     7.9 %
Interest expense related to contractual interest coupon
    6       6       12       13  
Interest expense related to amortization of discount and issuance costs
    14       13       27       26  


 
13

 


 
Effect of adjustment for retrospective application of new accounting standards on financial statements:  The following tables set forth the financial statement line items affected by the retrospective application of the new accounting standards for noncontrolling interests and certain convertible debt as of and for the periods indicated:

   
Consolidated Statement of Operations
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
   
Noncontrolling Interests
   
Convertible Debt
 
                         
Quarter ended March 5, 2009:
                       
Other operating (income) expense, net
  $ 20     $ --     $ 1     $ 21  
Interest expense
    (35 )     --       (12 )     (47 )
Other non-operating income (expense), net
    (3 )     --       2       (1 )
Income tax provision
    (4 )     --       (1 )     (5 )
Net loss
    (751 )     (51 )     (12 )     (814 )
Net loss attributable to Micron
    --       (751 )     (12 )     (763 )
Net loss per share:
                               
Basic and diluted
    (0.97 )     --       (0.02 )     (0.99 )
                                 
Six months ended March 5, 2009:
                               
Other operating (income) expense, net
  $ 29     $ --     $ 1     $ 30  
Interest expense
    (65 )     --       (23 )     (88 )
Other non-operating income (expense), net
    (12 )     --       1       (11 )
Income tax provision
    (17 )     --       (1 )     (18 )
Net loss
    (1,457 )     (64 )     (24 )     (1,545 )
Net loss attributable to Micron
    --       (1,457 )     (24 )     (1,481 )
Net loss per share:
                               
Basic and diluted
    (1.88 )     --       (0.03 )     (1.91 )

   
Consolidated Balance Sheet
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
As of September 3, 2009
 
Noncontrolling Interests
   
Convertible Debt
 
                         
Assets
                       
Property, plant and equipment, net
  $ 7,081     $ --     $ 8     $ 7,089  
Other assets
    371       --       (4 )     367  
Total assets
    11,455       --       4       11,459  
                                 
Liabilities and equity
                               
Long-term debt
  $ 2,674     $ --     $ (295 )   $ 2,379  
Total liabilities
    4,815       --       (295 )     4,520  
                                 
Micron shareholders’ equity:
                               
Additional capital
    6,863       --       394       7,257  
Accumulated deficit
    (2,291 )     --       (94 )     (2,385 )
Accumulated other comprehensive (loss)
    (3 )     --       (1 )     (4 )
Total equity of Micron shareholders
    --       4,654       299       4,953  
Total equity
    4,654       1,986       299       6,939  
Total liabilities and equity
    11,455       --       4       11,459  


 
14

 


 

   
Consolidated Statement of Cash Flows
 
   
As Previously Reported
   
Effects of Adoption
   
As Retrospectively Adjusted
 
   
Noncontrolling Interests
   
Convertible Debt
 
                         
Six Months Ended March 5, 2009:
                       
Cash flows from operating activities:
                       
Net loss
  $ (1,457 )   $ (64 )   $ (24 )   $ (1,545 )
Depreciation and amortization
    1,134       --       23       1,157  
Noncontrolling interests in net income(loss)
    (64 )     64       --       --  
Other
    8       --       1       9  


Derivative Financial Instruments

The Company is exposed to currency exchange rate risk for monetary assets and liabilities held in foreign currencies, primarily the Singapore dollar, euro and yen.  The Company uses derivative instruments to manage exposures to foreign currency.  The Company’s primary objective in entering into these derivatives is to reduce the volatility of earnings associated with changes in foreign currency.  The Company’s derivatives consist primarily of forward contracts that are designed to reduce the impact that changes in foreign exchange rates have on earnings attributable to Micron shareholders.  The Company utilizes a rolling hedge strategy with currency forward contracts that generally mature within 35 days.  The currency forward contracts are not designated for hedge accounting.  At the end of each reporting period, the Company’s monetary assets and liabilities denominated in foreign currencies are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Foreign currency forward contracts are valued at fair values based on bid prices of dealer or exchange quotations (referred to as Level 2).  Realized and unrealized foreign currency gains and losses on derivative instruments and the underlying monetary assets are included in other operating income (expense).

The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement.  The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across multiple major financial institutions.  In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Total gross notional amounts and fair values for derivative currency forward contracts outstanding as of March 4, 2010, presented by currency, were as follows:

Currency
 
Notional Amount Outstanding
(in U.S. Dollars)
 
Balance Sheet Location
 
Fair Value
of Asset (Liability)
 
               
Singapore dollar
  $ 287  
Accounts payable and accrued expenses
  $ --  
Euro
    149  
Accounts payable and accrued expenses
    (1 )
Yen
    94  
Accounts payable and accrued expenses
    --  
    $ 530       $ (1 )

For the second quarter and first six months of 2010, the Company recognized losses of $24 million and $15 million, respectively, included in other operating income (expense), on currency forward contracts.


Fair Value Measurements

The 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), observable 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).
 
15

 

Fair value measurements on a recurring basis: Assets measured at fair value on a recurring basis as of March 4, 2010 and September 3, 2009 were as follows:

   
As of March 4, 2010
   
As of September 3, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                                 
Money market(1)
  $ 1,506     $ --     $ --     $ 1,506     $ 1,184     $ --     $ --     $ 1,184  
Certificates of deposit(2)
    --       353       --       353       --       217       --       217  
Marketable equity investments(3)
    22       --       --       22       15       --       --       15  
Assets held for sale(3)(4)
    --       --       70       70       --       --       --       --  
    $ 1,528     $ 353     $ 70     $ 1,951     $ 1,199     $ 217     $ --     $ 1,416  
                                                                 
(1)Included in cash and equivalents.
 
(2)$292 million and $61 million included in cash and equivalents and other noncurrent assets, respectively, as of March 4, 2010 and $187 million and $30 million, respectively, as of September 3, 2009.
 
(3)Included in other noncurrent assets.
 
(4) The Company adopted the accounting standard for fair value measurements of nonfinancial assets and nonfinancial liabilities as of the beginning of 2010.
 

Certificates of deposit assets are valued using observable inputs in active markets for similar assets or alternative pricing sources and models utilizing observable market inputs (Level 2).  During the first quarter of 2009, the Company recognized impairment charges of $7 million for other-than-temporary declines in the value of marketable equity instruments.

Assets held for sale is primarily comprised of used semiconductor equipment, which are valued based on inputs obtained from equipment dealers that require assumptions including the remaining useful life and configuration of the equipment (Level 3).  Losses recognized in the second quarter and first six months of 2010 due to fair value measurements using Level 3 inputs were de minimis.

Fair value of financial instruments:  As of March 4, 2010, the estimated aggregate fair value of the Company’s convertible debt instruments was $1,688 million compared to their aggregate carrying value of $1,331 million in debt (the carrying value excludes the equity component of the Convertible Notes which is classified in equity).  As of September 3, 2009, the estimated aggregate fair value of the Company’s convertible debt instruments was $1,410 million compared to their aggregate carrying value of $1,305 million in debt (the carrying value excludes the equity component of the Convertible Notes which is classified in equity).  The fair value of the Company’s convertible debt instruments is based on quoted market prices in active markets (Level 1).  As of March 4, 2010 and September 3, 2009, the aggregate fair value of the Company’s other debt instruments was $1,379 million and $1,458 million, respectively, as compared to their aggregate carrying value of $1,388 million and $1,498 million, respectively.  The fair value of the Company’s other debt instruments was estimated based on discounted cash flows using inputs that are observable in the market or that could be derived from or corroborated with observable market data, including interest rates based on yield curves of similar debt issues from parties with similar credit ratings as the Company (Level 2).  Amounts reported as cash and equivalents, short-term investments, receivables, other assets, and accounts payable and accrued expenses approximate their fair values.

Fair value measurements on a nonrecurring basis:  In connection with its acquisition on December 18, 2009 of a 50% interest in its Transform joint venture, the Company determined the fair value of its investment in Transform primarily based on an income approach incorporating projected cash flows and a risk-adjusted discount rate that incorporates market participants’ assumptions.  Inputs used in the income approach, such as future revenues and expenses, were based on unobservable inputs (Level 3).  The aggregate $65 million estimated fair value of the Company’s investment in Transform approximated the carrying value of the nonmonetary assets the Company contributed and no gain or loss was recognized. (See “Equity Method Investments – Transform” note.)

In connection with the implementation of the FASB’s new accounting standard for certain convertible debt instruments in the first quarter of 2010, the Company determined the $898 million fair value for the liability component of its Convertible Notes as of their May 2007 issuance date using a market interest rate for similar nonconvertible debt issued at that time by entities with credit ratings comparable to the Company’s (Level 2).  (See “Adjustment for Retrospective Application of New Accounting Standards” note.)



 
16

 


 
Equity Plans

As of March 4, 2010, under its equity plans, the Company had an aggregate of 180.8 million shares of its common stock reserved for issuance of stock and restricted stock awards, of which 129.9 million shares were subject to outstanding awards and 50.9 million shares were available for future grants.  Awards are subject to terms and conditions as determined by the Company’s Board of Directors.

Stock options:  The Company granted 1.6 million and 15.7 million stock options during the second quarter and first six months of 2010, respectively, with weighted-average grant-date fair values per share of $5.04 and $4.13, respectively.  The Company granted 14.0 million and 20.8 million stock options during the second quarter and first six months of 2009, respectively, with weighted-average grant-date fair values per share of $1.34 and $1.66, respectively.

The fair values of option awards were estimated as of the date of grant using the Black-Scholes option valuation model.  The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and requires the input of subjective assumptions, including the expected stock price volatility and estimated option life.  The expected volatilities utilized were based on implied volatilities from traded options on the Company’s stock and on historical volatility.  The expected lives of options granted in and subsequent to 2009 were based, in part, on historical experience and on the terms and conditions of the options.  The expected lives of options granted prior to 2009 were based on the simplified method provided by the Securities and Exchange Commission.  The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at the time of the grant.  No dividends were assumed in estimated option values.  Assumptions used in the Black-Scholes model are presented below:

   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Average expected life in years
    5.19       4.99       5.11       4.91  
Weighted-average expected volatility
    56 %     79 %     60 %     73 %
Weighted-average risk-free interest rate
    2.5 %     1.6 %     2.3 %     1.9 %

Restricted stock and restricted stock units (“Restricted Stock Awards”):  As of March 4, 2010, there were 9.5 million shares of Restricted Stock Awards outstanding, of which 2.5 million were performance-based Restricted Stock Awards.  For service-based Restricted Stock Awards, restrictions generally lapse either in one-fourth or one-third increments during each year of employment after the grant date.  For performance-based Restricted Stock Awards, vesting is contingent upon meeting certain Company-wide performance goals, the achievement of which was deemed probable as of March 4, 2010.

The Company granted 1.8 million and 1.1 million shares of service-based and performance-based Restricted Awards, respectively, during the first six months of 2010.  During the second quarter of 2009, the Company granted 0.2 million shares of service-based Restricted Awards and during the first six months of 2009, granted 1.9 million and 1.7 million shares of service-based and performance-based Restricted Awards, respectively.  The weighted-average grant-date fair values per share was $7.51 for Restricted Awards granted during the first six months of 2010 and were $2.07 and $4.40 for Restricted Awards granted during the second quarter and first six months of 2009, respectively.


 
17

 


 
Stock-based compensation expense:  Total compensation costs for the Company’s equity plans were as follows:

   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Stock-based compensation expense by caption:
                       
Cost of goods sold
  $ 6     $ 4     $ 13     $ 8  
Selling, general and administrative
    11       6       30       8  
Research and development
    5       3       10       6  
    $ 22     $ 13     $ 53     $ 22  
                                 
Stock-based compensation expense by type of award:
                               
Stock options
  $ 11     $ 8     $ 19     $ 15  
Restricted stock
    11       5       34       7  
    $ 22     $ 13     $ 53     $ 22  

During the first quarter of 2010, the Company determined that certain performance-based restricted stock that previously had not been expensed met the probability threshold for expense recognition due to improved operating results.  As of March 4, 2010, $128 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards was expected to be recognized through the second quarter of 2014, resulting in a weighted-average period of 1.34 years.  Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with the Company’s treatment of income or loss from its U.S. operations.  (See “Income Taxes” note.)


Restructure

In response to a severe downturn in the semiconductor memory industry and global economic conditions, the Company initiated a restructure plan in 2009 primarily within the Company’s Memory segment.  In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel, terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility.  Also, the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility in the first quarter of 2009.  In addition, the Company phased out all remaining 200mm DRAM wafer manufacturing operations in Boise, Idaho in the second half of 2009.  The Company does not expect to incur any additional material restructure charges related to the plan initiated in 2009.  The following table summarizes restructure charges (credits) resulting from the restructure activities:

   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
(Gain) write-down of equipment
  $ (1 )   $ 87     $ (5 )   $ 143  
Severance and other termination benefits
    --       17       1       39  
Gain from termination of NAND Flash supply agreement
    --       --       --       (144 )
Other
    --       1       2       1  
    $ (1 )   $ 105     $ (2 )   $ 39  

During the second and first quarters of 2010, the Company made cash payments of $1 million and $5 million, respectively, for severance and related termination benefits, and costs to decommission production facilities.  As of March 4, 2010 and September 3, 2009, $2 million and $5 million, respectively, of restructure costs, primarily related to severance and other termination benefits, remained unpaid and were included in accounts payable and accrued expenses.



 
18

 


 
Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
(Gain) loss on disposition of property, plant and equipment
  $ (7 )   $ 29     $ (9 )   $ 43  
(Gain) loss from changes in currency exchange rates
    (2 )     (6 )     19       (3 )
Other
    (11 )     (2 )     (21 )     (10 )
    $ (20 )   $ 21     $ (11 )   $ 30  

Other operating income in the second quarter of 2010 includes $11 million of receipts from the U.S. government in connection with anti-dumping tariffs which is reflected in other in the table above.


Income Taxes

Income taxes for the second quarters and first six months of 2010 and 2009 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax.  The Company has a valuation allowance for its net deferred tax asset associated with its U.S. operations.  The (provision) benefit for taxes on U.S. operations in 2010 and 2009 was substantially offset by changes in the valuation allowance.


Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding.  Diluted earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding plus the dilutive effects of stock options and convertible notes.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from diluted earnings per share calculations.  Antidilutive potential common shares that could dilute basic earnings per share in the future were 98.3 million and 99.9 million for the second quarter and first six months of 2010, respectively, and were 228.7 million for the second quarter and first six months of 2009.


 
19

 


 
On February 9, 2010, the Company announced that it signed a definitive agreement to acquire all the outstanding shares of Numonyx Holdings B.V. in exchange for 140 million to 150 million shares of the Company’s common stock.  The transaction is subject to regulatory review and other customary closing conditions and is currently anticipated to close in the third or fourth quarter of 2010.  (See “Numonyx Holdings B.V.” note.)


   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Net income (loss) available to Micron’s shareholders – Basic
  $ 365     $ (763 )   $ 569     $ (1,481 )
Net effect of assumed conversion of debt
    24       --       47       --  
Net income (loss) available to Micron’s shareholders – Diluted
  $ 389     $ (763 )   $ 616     $ (1,481 )
                                 
Weighted-average common shares outstanding – Basic
    847.6       773.9       847.0       773.6  
Net effect of dilutive stock options and assumed conversion of debt
    157.7       --       156.1       --  
Weighted-average common shares outstanding – Diluted
    1,005.3       773.9       1,003.1       773.6  
                                 
Earnings (loss) per share:
                               
Basic
  $ 0.43     $ (0.99 )   $ 0.67     $ (1.91 )
Diluted
    0.39       (0.99 )     0.61       (1.91 )


Comprehensive Income (Loss)

The components of comprehensive income (loss) and comprehensive income (loss) attributable to Micron were as follows:

   
Quarter Ended
   
Six Months Ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Net income (loss)
  $ 379     $ (814 )   $ 581     $ (1,545 )
Other comprehensive income (loss), net of tax:
                               
Accumulated translation adjustment
    3       (4 )     11       (4 )
Unrealized gain on investment
    4       --       4       4  
Other
    1       1       1       1  
Total other comprehensive income (loss)
    8       (3 )     16       1  
Comprehensive income (loss)
    387       (817 )     597       (1,544 )
Comprehensive (income) loss attributable to noncontrolling interests
    (14 )     51       (12 )     64  
Comprehensive income (loss) attributable to Micron
  $ 373     $ (766 )   $ 585     $ (1,480 )



 
20

 


 
Consolidated Variable Interest Entities

NAND Flash joint ventures with Intel (“IM Flash”):  The Company has formed two joint ventures with Intel (IM Flash Technologies, LLC formed January 2006 and IM Flash Singapore, LLP formed February 2007) to manufacture NAND Flash memory products for the exclusive benefit of the partners.  IMFT and IMFS are each governed by a Board of Managers, with the Company and Intel initially appointing an equal number of managers to each of the boards.  The number of managers appointed by each party adjusts depending on the parties’ ownership interests.  These ventures will operate until 2016 but are subject to prior termination under certain terms and conditions.  IMFT and IMFS are aggregated as IM Flash in the following disclosure due to the similarity of their ownership structure, function, operations and the way the Company’s management reviews the results of their operations.  The partner’s ownership percentages are based on contributions to the partnership.  As of March 4, 2010, the Company owned approximately 51% and Intel owned approximately 49% of IM Flash.

IM Flash is a variable interest entity because all costs of IM Flash are passed to the Company and Intel through product purchase agreements.  IM Flash is dependent upon the Company and Intel for any additional cash requirements.  The Company and Intel are considered related parties under the accounting standards for consolidating variable interest entities due to restrictions on transfers of ownership interests.  As a result, the primary beneficiary of IM Flash is the entity that is most closely associated with IM Flash.  The Company considered several factors to determine whether it or Intel is more closely associated with IM Flash, including the size and nature of IM Flash’s operations relative to the Company and Intel, and which entity had the majority of economic exposure under the purchase agreements.  Based on those factors, the Company determined that it is more closely associated with IM Flash and is therefore the primary beneficiary.  Accordingly, the financial results of IM Flash are included in the Company’s consolidated financial statements and all amounts pertaining to Intel’s interests in IM Flash are reported as noncontrolling interests in subsidiaries.

IM Flash manufactures NAND Flash memory products using designs developed by the Company and Intel.  Product design and other research and development (“R&D”) costs for NAND Flash are generally shared equally between the Company and Intel.  As a result of reimbursements received from Intel under a NAND Flash R&D cost-sharing arrangement, the Company’s R&D expenses were reduced by $29 million and $55 million for the second quarter and first six months of 2010, respectively, and by $25 million and $57 million for the second quarter and first six months of 2009, respectively.

IM Flash sells products to the joint venture partners generally in proportion to their ownership at long-term negotiated prices approximating cost.  IM Flash sales to Intel were $172 million and $365 million for the second quarter and first six months of 2010, respectively, and were $215 million and $533 million for the second quarter and first six months of 2009, respectively.  As of March 4, 2010 and September 3, 2009, IM Flash had receivables from Intel primarily for sales of NAND Flash products of $96 million and $95 million, respectively.  In addition, as of March 4, 2010 and September 3, 2009, the Company had receivables from Intel of $33 million and $29 million, respectively, related to NAND Flash product design and process development activities.  As of March 4, 2010 and September 3, 2009, IM Flash had payables to Intel of $3 million for various services.

In the first quarter of 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore and the Company and Intel agreed to suspend tooling and the ramp of production at this facility through the first quarter of 2010.  In the second quarter of 2010, IM Flash began moving forward with start-up activities in the Singapore wafer fabrication facility, including placing purchase orders and preparing the facility for tool installations that will commence in 2011.  The level of the Company’s future capital contributions to IM Flash will depend on the extent to which Intel participates with the Company in future IM Flash capital calls.

IM Flash distributed $84 million and $172 million to Intel in the second quarter and first six months of 2010, respectively, and $88 million and $179 million to the Company in the second quarter and first six months of 2010, respectively.  The Company contributed $25 million to IM Flash in the second quarter of 2010 and Intel did not match the Company’s contribution.  IM Flash distributed $318 million and $463 million to Intel in the second quarter and first six months of 2009, respectively, and $331 million and $482 million to the Company in the second quarter and first six months of 2009, respectively.  In the second quarter of 2009, Intel contributed $24 million and the Company contributed $25 million to IM Flash. The Company’s ability to access IM Flash’s cash and marketable investment securities ($153 million as of March 4, 2010) to finance the Company’s other operations is subject to agreement by the joint venture partners.


 
21

 


 
Total IM Flash assets and liabilities included in the Company’s consolidated balance sheets are as follows:

As of
 
March 4,
2010
   
September 3,
2009
 
             
Assets
           
Cash and equivalents
  $ 153     $ 114  
Receivables
    112       111  
Inventories
    161       161  
Other current assets
    5       8  
Total current assets
    431       394  
Property, plant and equipment, net
    3,036       3,377  
Other assets
    58       63  
Total assets
  $ 3,525     $ 3,834  
                 
Liabilities
               
Accounts payable and accrued expenses
  $ 98     $ 93  
Deferred income
    135       137  
Equipment purchase contracts
    2       1  
Current portion of long-term debt
    6       6  
Total current liabilities
    241       237  
Long-term debt
    64       66  
Other liabilities
    3       4  
Total liabilities
  $ 308     $ 307  
                 
Amounts exclude intercompany balances that are eliminated in the Company’s consolidated balance sheets. IMFT and IMFS are aggregated as IM Flash in this disclosure due to the similarity of their ownership structure, function, operations and the way the Company’s management reviews the results of their operations.
 

The creditors of IM Flash have recourse only to the assets of IM Flash and do not have recourse to any other assets of the Company.

MP Mask Technology Center, LLC (“MP Mask”):  In 2006, the Company formed a joint venture, MP Mask, with Photronics, Inc. (“Photronics”) to produce photomasks for leading-edge and advanced next generation semiconductors.  At inception and through March 4, 2010, the Company owned 50.01% and Photronics owned 49.99% of MP Mask.  The Company purchases a substantial majority of the reticles produced by MP Mask pursuant to a supply arrangement.  In connection with the formation of the joint venture, the Company received $72 million in 2006 in exchange for entering into a license agreement with Photronics, which is being recognized over the term of the 10-year agreement.  As of March 4, 2010, deferred income and other noncurrent liabilities included an aggregate of $44 million related to this agreement.  MP Mask made distributions to both the Company and Photronics of $5 million each in the first quarter of 2009.

MP Mask is a variable interest entity because all costs of MP Mask are passed on to the Company and Photronics through product purchase agreements and MP Mask is dependent upon the Company and Photronics for any additional cash requirements.  The Company and Photronics are also considered related parties under the accounting standards for consolidating variable interest entities due to restrictions on transfers of ownership interests.  As a result, the primary beneficiary of MP Mask is the entity that is more closely associated with MP Mask.  The Company considered several factors to determine whether it or Photronics is more closely associated with the joint venture.  The most important factor was the nature of the joint venture’s operations relative to the Company and Photronics.  Based on those factors, the Company determined that it is more closely associated with the joint venture and therefore is the primary beneficiary.  Accordingly, the financial results of MP Mask are included in the Company’s consolidated financial statements and all amounts pertaining to Photonics’ interest in MP Mask are reported as noncontrolling interests in subsidiaries.


 
22

 


 
Total MP Mask assets and liabilities included in the Company’s consolidated balance sheets are as follows:

As of
 
March 4,
2010
   
September 3,
2009
 
             
Current assets
  $ 34     $ 25  
Noncurrent assets (primarily property, plant and equipment)
    85       97  
Current liabilities
    5       8  
                 
Amounts exclude intercompany balances that are eliminated in the Company’s consolidated balance sheets.
 

The creditors of MP Mask have recourse only to the assets of MP Mask and do not have recourse to any other assets of the Company.

Since the third quarter of 2009, the Company has leased to Photronics a facility to produce photomasks.  In the second quarter and first six months of 2010, the Company received $2 million and $3 million, respectively, in lease payments from Photronics.


TECH Semiconductor Singapore Pte. Ltd.

Since 1998, the Company has participated in TECH Semiconductor Singapore Pte. Ltd. (“TECH”), a semiconductor memory manufacturing joint venture in Singapore among the Company, Canon Inc. and Hewlett-Packard Company (“HP”).  The financial results of TECH are included in the Company’s consolidated financial statements and all amounts pertaining to Canon Inc. and HP are reported as noncontrolling interests in subsidiaries.  On January 27, 2010, the Company purchased shares of TECH for $80 million, which increased the Company’s ownership from approximately 85% to approximately 87% and increased additional capital of Micron shareholders’ by $10 million.  As of March 4, 2010, the Company held an approximate 87% interest in TECH.

The shareholders’ agreement for the TECH joint venture expires in April 2011.  In September 2009, TECH received a notice from HP that it does not intend to extend the TECH joint venture beyond April 2011.  The Company is working with HP and Canon to reach a resolution of the matter.  The parties’ inability to reach a resolution of this matter prior to April 2011 could result in the dissolution of TECH.

TECH’s cash and marketable investment securities ($181 million as of March 4, 2010) are not anticipated to be available to pay dividends to the Company or finance its other operations.  As of March 4, 2010, TECH had $447 million outstanding under a credit facility which is collateralized by substantially all of the assets of TECH (carrying value of approximately $1,619 million as of March 4, 2010) and contains covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios, and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets.  In the first quarter of 2010, the covenants were modified and as of March 4, 2010, TECH was in compliance with the covenants.  In connection with the modification, the Company had guaranteed approximately 87% of the outstanding amount borrowed under TECH’s credit facility as of March 4, 2010 and its guarantee will increase to 100% on April 11, 2010.  (See “Debt” note.)


Numonyx Holdings B.V.

On February 9, 2010, the Company announced that it signed a definitive agreement with Intel Corporation, Intel Technology Asia Pte Ltd, STMicroelectronics N.V., Redwood Blocker S.a.r.l. and PK Flash, LLC, (collectively, the “Sellers”), to acquire all the outstanding shares of Numonyx Holdings B.V. (“Numonyx”), a provider of NOR Flash, NAND Flash, RAM and Phase Change non-volatile memory technologies and products.  Under the terms of the agreement, the Company will purchase all of the outstanding capital stock of Numonyx and assume all outstanding restricted stock units held by Numonyx employees in exchange for 140 million shares of the Company’s common stock.  The number of shares issued by the Company is subject to a purchase price adjustment, which provides for up to an additional 10 million shares of the Company’s stock to be issued on a linear basis to the Sellers to the extent the average of the volume weighted average prices of the Company’s shares for the 20 trading days, ending two trading days prior to the closing of the share purchase agreement, ranges from $9.00 to $7.00 per share.  The transaction is subject to regulatory review and other customary closing conditions and is currently anticipated to close in the third or fourth quarter of 2010.

 
23

 

Segment Information

The primary products of the Company’s Memory segment are DRAM and NAND Flash memory.  In 2009, the Company had two reportable segments, Memory and Imaging.  In the first quarter of 2010, Imaging no longer met the quantitative thresholds of a reportable segment and management does not expect that Imaging will meet the quantitative thresholds in future years.  As a result, Imaging is no longer considered a reportable segment and is included in the All Other nonreportable segments.  Prior period amounts have been recast to reflect Imaging in All Other.  Operating results of All Other primarily reflect activity of Imaging and also include activity of microdisplay, solar and other operations.  Segment information reported below is consistent with how it is reviewed and evaluated by the Company’s chief operating decision makers and is based on the nature of the Company’s operations and products offered to customers.  The Company does not identify or report depreciation and amortization, capital expenditures or assets by segment.

   
Quarter ended
   
Six months ended
 
   
March 4,
2010
   
March 5,
2009
   
March 4,
2010
   
March 5,
2009
 
                         
Net sales:
                       
Memory
  $ 1,872     $ 910     $ 3,495     $ 2,132  
All Other
    89       83       206       263  
Total consolidated net sales
  $ 1,961     $ 993     $ 3,701     $ 2,395  
                                 
Operating income (loss):
                               
Memory
  $ 428     $ (607 )   $ 641     $ (1,282 )
All Other
    (13 )     (102 )     (25 )     (99 )
Total consolidated operating income (loss)
  $ 415     $ (709 )   $ 616     $ (1,381 )


Certain Concentrations

Sales to HP, Intel and Apple were 13%, 9% and 8%, respectively, of net sales in the second quarter of 2010, and were 13%, 10% and 10%, respectively, of net sales in the first six months of 2010.  Sales to Intel were 22% and 24% of net sales in the second quarter and first six months of 2009, respectively.  These sales were included in the Memory segment.



 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements include, but are not limited to, statements such as those made in “Overview” regarding completion of the acquisition of Numonyx; “Results of Operations” regarding the future composition of the Company’s reportable segments; in “Net Sales” regarding future royalty and other payments from Nanya,  in “Gross Margin” regarding future charges for inventory write-downs; in “Selling, General and Administrative” regarding future legal expenses; in “Stock-based Compensation” regarding future costs to be recognized; in “Liquidity and Capital Resources” regarding capital spending in 2010 and future distributions from IM Flash to Intel; and in “Recently Issued Accounting Standards” regarding the impact from the adoption of new accounting standards.   The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, those identified in “PART II.  OTHER INFORMATION – Item 1A.  Risk Factors.”  This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes and with the Company’s Annual Report on Form 10-K for the year ended September 3, 2009 and Form 8-K filed on March 3, 2010.  All period references are to the Company’s fiscal periods unless otherwise indicated.  The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s fiscal 2010, which ends on September 2, 2010, contains 52 weeks.  All tabular dollar amounts are in millions.  All production data includes production of the Company and its consolidated joint ventures and the Company’s supply from Inotera.


Overview

The Company is a global manufacturer and marketer of semiconductor devices, principally DRAM and NAND Flash memory.  In addition, the Company manufactures semiconductor components for CMOS image sensors and other semiconductor products.  Its products are used in a broad range of electronic applications including personal computers, workstations, network servers, mobile phones and other consumer applications including Flash memory cards, USB storage devices, digital still cameras, MP3/4 players and in automotive applications.  The Company markets its products through its internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers and retailers located around the world.  The Company’s success is largely dependent on the market acceptance of its diversified portfolio of semiconductor products, efficient utilization of the Company’s manufacturing infrastructure, successful ongoing development of advanced process technologies and the return on research and development investments.

The Company has made significant investments to develop the proprietary product and process technology that is implemented in its worldwide manufacturing facilities and through its joint ventures to enable the production of semiconductor products with increasing functionality and performance at lower costs.  The Company generally reduces the manufacturing cost of each generation of product through advancements in product and process technology such as its leading-edge line-width process technology and innovative array architecture.  The Company continues to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption and increased memory density.  To leverage its significant investments in research and development, the Company has formed various strategic joint ventures under which the costs of developing memory product and process technologies are shared with its joint venture partners.  In addition, from time to time, the Company has also sold and/or licensed technology to other parties.  The Company continues to pursue additional opportunities to recover its investment in intellectual property through partnering and other arrangements.

Since the second half of calendar 2009, the semiconductor memory industry has experienced improving conditions following a severe prolonged downturn that resulted from a significant oversupply of products and challenging global economic conditions.  Average selling prices per gigabit for the Company’s DRAM products increased 7% for the second quarter of 2010 as compared to the first quarter of 2010 after increasing 21% for the first quarter of 2010 as compared to the fourth quarter of 2009.   Average selling prices per gigabit for the Company’s NAND Flash products were relatively unchanged for the second quarter of 2010 as compared to the first quarter of 2010 after increasing 5% for the first quarter of 2010 as compared to the fourth quarter of 2009.  The Company reported net income attributable to Micron of $365 million for the second quarter of 2010 and $204 million for the first quarter of 2010.  The Company recognized net losses attributable to Micron of $1.9 billion for 2009, $1.7 billion for 2008 and $331 million for 2007.


 
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Numonyx Holdings B.V. (“Numonyx”): On February 9, 2010, the Company announced that it signed a definitive agreement with Intel Corporation, Intel Technology Asia Pte Ltd, STMicroelectronics N.V. (“ST”), Redwood Blocker S.a.r.l. and PK Flash, LLC, (collectively, the “Sellers”), to acquire all the outstanding shares of Numonyx Holdings B.V., a provider of NOR Flash, NAND Flash, RAM and Phase Change non-volatile memory technologies and products.  Under the terms of the agreement, the Company will purchase all of the outstanding capital stock of Numonyx and assume all outstanding restricted stock units held by Numonyx employees in exchange for 140 million shares of the Company’s common stock.  The number of shares issued by the Company is subject to a purchase price adjustment, which provides for up to an additional 10 million shares of the Company’s stock to be issued on a linear basis to the Sellers to the extent the average of the volume weighted average prices of the Company’s shares for the 20 trading days, ending two trading days prior to the closing of the share purchase agreement, ranges from $9.00 to $7.00 per share.  The transaction is subject to regulatory review and other customary closing conditions and is currently anticipated to close in the third or fourth quarter of 2010.  The parties have made the requisite filings with the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the 30-day waiting periods with respect to those filings have expired.  Competition and merger control filings relating to the transaction have also been made in a number of additional jurisdictions, and clearances have been received from the relevant authorities in Germany, South Korea and Taiwan.

Numonyx B.V., a wholly owned subsidiary of Numonyx, holds a minority equity interest in Hynix-Numonyx Semiconductor Ltd. (the “Hynix JV”), a joint venture with Hynix Semiconductor, Inc. (“Hynix”) and Hynix Semiconductor (WUXI) Limited, formed pursuant to a joint venture agreement originally entered into between ST and Hynix prior to the formation of Numonyx (as amended and restated, the “JV Agreement”).  Under the terms of the JV Agreement, upon the consummation of the Numonyx acquisition, the parties have certain rights to buy or sell or cause the other party to buy or sell their interests in the Hynix JV.  If Hynix were to exercise its purchase rights following the Numonyx acquisition, Hynix would be required to pay Numonyx B.V. an amount equal to the net book value of the Hynix JV multiplied by Numonyx B.V.’s percentage ownership interest in the Hynix JV.  Concurrent with the execution of the Purchase Agreement, Micron, ST and Numonyx B.V. entered into a framework agreement (the “Framework Agreement”) pursuant to which Numonyx B.V. and ST have agreed to take certain actions in connection with the outstanding $250 million loan (the “Loan”) by DBS Bank Ltd. (“DBS”) to the Hynix JV.  Under the terms of the Framework Agreement, if Hynix exercises its purchase rights described above, or if Numonyx otherwise transfers its stake in the Hynix JV to Hynix or a third party, it is anticipated that Numonyx B.V. will succeed to ST’s guarantee obligations and DBS’s rights as a creditor with respect to the Loan based upon the amount of net proceeds received by Numonyx B.V. for its interests in the Hynix JV.  Numonyx also has a supply arrangement with Hynix JV through which Numonyx acquires a material amount of its NAND and DRAM products used in Numonyx’s products.  Should Hynix exercise its purchase rights described above, upon notice, such supply arrangement may be terminated by Hynix.  In the event the Company is unable to negotiate an extension of such arrangement or a new arrangement on favorable terms, the Company will be required to secure and qualify alternative internal sources of supply to maintain the current sales volumes.  Any discontinuation of supply or change in terms would occur no earlier than three months from consummation of the Numonyx acquisition, but could be significantly longer depending upon the timing of any required regulatory approvals.

For its fiscal year ended December 31, 2009, Numonyx reported a net loss of $247 million on net sales of $1.8 billion and generated $153 of cash flows from operations.  For its fiscal year ended December 31, 2009, Numonyx reported total assets of $2.5 billion and total liabilities of $1.3 billion.

Adjustment for Retrospective Application of New Accounting Standards: Effective at the beginning of 2010, the Company adopted new accounting standards for noncontrolling interests and certain convertible debt instruments.  The impact of the retrospective adoption of the new accounting standards is summarized below.

Noncontrolling interests:  Under the new standard, noncontrolling interests in subsidiaries is (1) reported as a separate component of equity in the consolidated balance sheets and (2) included in net income in the statement of operations.

 
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Convertible debt instruments:  The new standard applies to convertible debt instruments that may be fully or partially settled in cash upon conversion and is applicable to the Company’s 1.875% convertible senior notes with an aggregate principal amount of $1.3 billion issued in May 2007 (the “Convertible Notes”).  The standard requires the liability and equity components of convertible notes to be accounted for separately.  The liability component recognized at the issuance of convertible notes equals the estimated fair value of a similar liability without a conversion option and the remainder of the proceeds received at issuance is allocated to equity.  In subsequent periods, the liability component recognized at issuance is increased to the principal amount of convertible notes through the amortization of interest costs.  In connection therewith, at the May 2007 issuance of the Convertible Notes there was a $402 million decrease in debt, a $394 million increase in additional capital, and an $8 million decrease in deferred debt issuance costs (included in other noncurrent assets).  Through 2009, $107 million of interest was amortized.

(See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Retrospective Adoption of New Accounting Standards.”)


Results of Operations

   
Second Quarter
     
First Quarter
     
Six Months
   
   
2010
   
% of net sales
     
2009
   
% of net sales
     
2010
   
% of net sales
     
2010
   
% of net sales
     
2009
   
% of net sales
   
   
(amounts in millions and as a percent of net sales)
   
Net sales:
                                                                     
Memory
  $ 1,872       95   %   $ 910       92   %   $ 1,623       93   %   $ 3,495       94   %   $ 2,132       89   %
All Other
    89       5   %     83       8   %     117       7   %     206       6   %     263