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MICRON TECHNOLOGY INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) As used herein, "we," "our," "us" and similar terms include Micron Technology, Inc. and its subsidiaries, unless the context indicates otherwise. The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in "Operating Results - Gross Margin" regarding sales of products that were written up as a result of our acquisition of Elpida; in "Operating Results by Product" regarding the timing and effect of the transition of our Singapore DRAM facility to NAND Flash production and increases in our DRAM production and sales volumes for 2014 as a result of the Elpida acquisition; in "Selling, General and Administrative" regarding SG&A costs for the second quarter of 2014; in "Research and Development" regarding R&D costs for the second quarter of 2014; in "Liquidity and Capital Resources" regarding the sufficiency of our cash and investments, regarding cash flows from operations and available financing to meet our requirements for at least the next 12 months, regarding our pursuit of additional financing and debt restructuring, regarding capital spending in 2014 and regarding the timing of payments for certain contractual obligations. Our actual results could differ materially from our historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Item 1A. Risk Factors." This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended August 29, 2013. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31 and fiscal 2014 and 2013 each contained 52 weeks. All production data includes the production of our consolidated joint ventures and our other partnering arrangements. All tabular dollar amounts are in millions. Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows: • Overview: An overview of our business and operations and highlights of key transactions and events. • Results of Operations: An analysis of our financial results consisting of the following: • Consolidated results; • Operating results by business segment; • Operating results by product; and • Operating expenses and other. • Liquidity and Capital Resources: An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and potential sources of liquidity. Overview We are one of the world's leading providers of advanced semiconductor solutions. Through our worldwide operations, we manufacture and market a full range of DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. We market our products through our internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers ("OEMs") and retailers located around the world. Our success is largely dependent on the market acceptance of our diversified portfolio of semiconductor products, efficient utilization of our manufacturing infrastructure, successful ongoing development of advanced process technologies and generating a return on research and development ("R&D") investments. We obtain products from three primary sources: (1) production from our wholly-owned manufacturing facilities, (2) production from our joint venture manufacturing facilities, and (3) to a lesser degree, from third party manufacturers. In recent years, we have increased our manufacturing scale and product diversity through strategic acquisitions and various partnering arrangements, including joint ventures. 34 -------------------------------------------------------------------------------- We make significant investments to develop the proprietary product and process technologies that are implemented in our worldwide manufacturing facilities and through our joint ventures. These investments enable our production of semiconductor products with increasing functionality and performance at lower costs. We generally reduce the manufacturing cost of each generation of product through advancements in product and process technology such as our leading-edge line-width process technology and innovative array architecture. We continue to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption, improved read/ write reliability and increased memory density. To leverage our significant investments in R&D, we have formed, and may continue to form, strategic joint ventures that allow us to share the costs of developing memory product and process technologies with joint venture partners. In addition, from time to time, we also sell and/or license technology to other parties. We continue to pursue additional opportunities to monetize our investment in intellectual property through partnering and other arrangements. Business Segments We have the following four reportable segments: DRAM Solutions Group ("DSG"): Includes DRAM products sold to the PC, consumer electronics, networking and server markets. Wireless Solutions Group ("WSG"): Includes DRAM, NAND Flash and NOR Flash products, including multi-chip packages, sold to the mobile device market. NAND Solutions Group ("NSG"): Includes high-volume NAND Flash products sold into data storage, personal music players and the high-density computing market, as well as NAND Flash products sold to Intel Corporation ("Intel") through our IM Flash Technologies, LLC. ("IMFT") joint venture. Embedded Solutions Group ("ESG"): Includes DRAM, NAND Flash and NOR Flash products sold into automotive and industrial applications, as well as NOR and NAND Flash sold to consumer electronics, networking, PC and server markets. Our other operations do not meet the quantitative thresholds of a reportable segment and are reported under All Other. Acquisition of Elpida Memory, Inc. On July 31, 2013, we acquired Elpida Memory, Inc. ("Elpida") for $615 million. On July 31, 2013, we also acquired a 24% ownership interest in Rexchip Electronics Corporation ("Rexchip''), now known as Micron Memory Taiwan Co., Ltd. ("MMT") for $334 million in cash. Elpida and its subsidiaries own approximately 65% of MMT's outstanding common stock. Therefore, as a result of the consummation of our acquisition of Elpida and the Rexchip shares, we own approximately 89% of MMT's common stock and are entitled to 100% of MMT's output. Elpida's assets include, among others: a 300mm DRAM wafer fabrication facility located in Hiroshima, Japan; its ownership interest in MMT, whose assets include a 300mm DRAM wafer fabrication facility located in Taichung City, Taiwan; and an assembly and test facility located in Akita, Japan. The Elpida and MMT fabrication facilities together represent approximately one-third of our wafer capacity. Elpida's semiconductor memory products include Mobile DRAM, targeted toward mobile phones and tablets. Elpida's operations are included primarily in the DSG and WSG segments. Our results of operations for the fourth quarter 2013 included approximately one month of operating results from the acquired Elpida operations. In addition, our results of operations for the fourth quarter 2013 included a $1,484 million gain on the acquisition of Elpida. The Elpida Companies are currently subject to corporate reorganization proceedings under the Corporate Reorganization Act of Japan. Because the plans of reorganization of Elpida Memory, Inc. ("Elpida") and Akita Elpida Memory, Inc. ("Akita" and, together with Elpida, the "Elpida Companies") provide for ongoing payments to creditors following the closing of the Elpida acquisition, these proceedings are continuing, and the Elpida Companies remain subject to the oversight of the Tokyo District Court (the "Japan Court") and of the trustees appointed by the Japan Court (including a trustee designated by us, who we refer to as the business trustee, and a trustee designated by the Japan Court, who we refer to as the legal trustee), pending completion of the reorganization proceedings. As a result of this oversight and related consent rights of the Japan Court and the legal trustee, our ability to effectively integrate the Elpida Companies as part of our global operations or to cause the Elpida Companies to take certain actions that we deem advisable for their businesses could be adversely affected if the Japan Court or the legal trustee is unwilling to consent to various actions. For more information, see "Part II, Item 1. Legal Proceedings - Reorganization Proceedings of the Elpida Companies" and "Part II, Item 1A. Risk Factors." 35--------------------------------------------------------------------------------Rambus In December 2013, subsequent to the end of our first fiscal quarter of 2014, we settled all pending litigation between us and Rambus, including all antitrust and patent matters. We also entered into a 7-year term patent cross-license agreement with Rambus that allows us to avoid costs of patent related litigation during the term. We agreed to pay Rambus up to $10 million per quarter over 7 years, for a total of $280 million. The primary benefits we received from these arrangements were (i) the settlement and termination of all existing litigation, (ii) the avoidance of future litigation expenses and (iii) the avoidance of future management and customer disruptions. As a result, other operating expense for the quarter ended November 28, 2013 included a $233 million charge to accrue a liability, which reflects the discounted value of amounts due under this arrangement. Results of Operations Consolidated Results First Quarter Fourth Quarter 2014 % of net sales 2013 % of net sales 2013 % of net sales (dollar amounts in millions) Net sales $ 4,042 100 % $ 1,834 100 % $ 2,843 100 % Cost of goods sold 2,761 68 % 1,617 88 % 2,135 75 % Gross margin 1,281 32 % 217 12 % 708 25 % SG&A 176 4 % 119 6 % 193 7 % R&D 320 8 % 224 12 % 267 9 % Restructure and asset impairments (3 ) - % (21 ) (1 )% 32 1 % Other operating (income) expense, net 237 6 % (8 ) - % 9 - % Operating income (loss) 551 14 % (97 ) (5 )% 207 7 % Gain on acquisition of Elpida - - % - - % 1,484 52 % Interest income (expense), net (96 ) (2 )% (54 ) (3 )% (58 ) (2 )% Other non-operating income (expense), net (80 ) (2 )% (59 ) (3 )% 45 2 % Income tax provision (80 ) (2 )% (13 ) (1 )% (5 ) - % Equity in net income (loss) of equity method investees 86 2 % (52 ) (3 )% 37 1 % Net income attributable to noncontrolling interests (23 ) (1 )% - - % (2 ) - % Net income (loss) attributable to Micron $ 358 9 % $ (275 ) (15 )% $ 1,708 60 % Net Sales First Quarter Fourth Quarter % of net % of net % of net 2014 sales 2013 sales 2013 sales DSG $ 1,785 44 % $ 600 33 % $ 1,239 44 % WSG 1,054 26 % 263 14 % 469 16 % NSG 806 20 % 617 34 % 781 27 % ESG 366 9 % 278 15 % 329 12 % All Other 31 1 % 76 4 % 25 1 % $ 4,042 100 % $ 1,834 100 % $ 2,843 100 % 36-------------------------------------------------------------------------------- Total net sales for the first quarter of 2014 increased 42% as compared to the fourth quarter of 2013 primarily due to higher WSG and DSG sales resulting from the acquisition of Elpida. Increases in DRAM and NAND Flash sales volumes from our legacy operations also contributed to the increase in net sales for the first quarter of 2014 as compared to the fourth quarter of 2013 which included one month of Elpida operations. The increases in gigabit sales from our legacy operations for the first quarter of 2014 were primarily driven by higher manufacturing output as a result of improvements in product and process technology. Total net sales for the first quarter of 2014 increased 120% as compared to the first quarter of 2013 primarily due to higher DSG and WSG sales resulting from the acquisition of Elpida. Increases in DRAM and NAND Flash sales volumes from our legacy operations also contributed to the increase in net sales for the first quarter of 2014 as compared to the first quarter of 2013. The increases in gigabit sales from our legacy operations for the first quarter of 2014 were primarily driven by higher manufacturing output as a result of improvements in product and process technology. Gross Margin Our overall gross margin percentage improved to 32% for the first quarter of 2014 from 25% for the fourth quarter of 2013 due to improvements in the gross margin percentage for DSG and WSG primarily due to an increase in volume of products resulting from the acquisition of Elpida and a shift in product mix, including a higher volume of wafer sales. Our overall gross margin percentage improved to 32% for the first quarter of 2014 from 12% for the first quarter of 2013 due to improvements in the gross margin percentage for DSG and WSG primarily due to improvements in margins for DRAM products. These improvements resulted from the acquisition of Elpida, manufacturing cost reductions and higher average selling prices. The gross margin for NSG for the first quarter of 2014 also improved from the first quarter of 2013 as cost reductions outpaced declines in average selling prices. For the first quarter of 2014, our costs of goods sold for DRAM products were adversely impacted by write-ups of inventories obtained in the acquisition of Elpida. In accounting for the Elpida acquisition, Elpida's inventories were recorded at fair value (based on their estimated future selling prices, estimated costs to complete and other factors), which was approximately $200 million higher than the cost of inventory recorded by Elpida prior to the acquisition. Of this amount, approximately $111 million was included in cost of goods sold for the first quarter of 2014 and $41 million was included in costs of goods sold for the fourth quarter of 2013. Substantially all of the remainder is expected to be included in cost of goods sold for the second quarter of 2014. For the first quarter of 2014, our costs of goods sold for DRAM products were also adversely impacted by higher costs of products purchased from our Inotera joint venture. We purchase substantially all of Inotera's output at a purchase price based on a discount from market prices for our comparable components. Our costs for Inotera product for the first quarter of 2014 increased from the fourth and first quarters of 2013 due to the increases in average selling prices for DRAM products. Operating Results by Business Segments DRAM Solutions Group ("DSG") First Quarter Fourth Quarter 2014 2013 2013 Net sales $ 1,785 $ 600 $ 1,239 Operating income (loss) 432 (112 ) 183 DSG sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our consolidated sales of DRAM products. (See "Operating Results by Product - DRAM" for further detail.) DSG sales for the first quarter of 2014 increased 44% as compared to the fourth quarter of 2013 primarily resulting from the acquisition of Elpida and higher average selling prices partially offset by the continuing transition of our Singapore DRAM fabrication facility to NAND Flash. DSG's operating margin for the first quarter of 2014 improved from the fourth quarter of 2013 primarily due to an increase in volume of products resulting from the acquisition of Elpida and a shift in product mix, including a higher volume of wafer sales. 37 -------------------------------------------------------------------------------- DSG sales for the first quarter of 2014 increased 198% as compared to the first quarter of 2013 primarily due to (1) the acquisition of Elpida, (2) higher average selling prices, (3) increased DRAM supply from Inotera as a result of the restructuring of our supply agreement and (4) higher output due to improvements in product and process technology. DSG sales for the first quarter of 2014 as compared to the first quarter of 2013 were adversely impacted by the continuing transition of our Singapore DRAM fabrication facility to NAND Flash. DSG's operating margin for the first quarter of 2014 improved from the first quarter of 2013 primarily due to the acquisition of Elpida and manufacturing cost reductions and higher average selling prices. Wireless Solutions Group ("WSG") First Quarter Fourth Quarter 2014 2013 2013 Net sales $ 1,054 $ 263 $ 469 Operating income (loss) 176 (64 ) (50 ) In the first quarter of 2014, WSG sales were comprised primarily of DRAM, NAND Flash and NOR Flash, in decreasing order of revenue, with mobile DRAM products accounting for a significant majority of the sales. WSG sales for the first quarter of 2014 increased 125% as compared to the fourth quarter of 2013 primarily due to the acquisition of Elpida. WSG's operating margin for the first quarter of 2014 improved from the fourth quarter of 2013 primarily due to an increase in volume of products resulting from the acquisition of Elpida and a shift in product mix, including a higher volume of wafer sales. WSG sales for the first quarter of 2014 increased 301% as compared to the first quarter of 2013 primarily due to the acquisition of Elpida. WSG's operating margin for the first quarter of 2014 improved from the first quarter of 2013 primarily due to the acquisition of Elpida. NAND Solutions Group ("NSG") First Quarter Fourth Quarter 2014 2013 2013 Net sales $ 806 $ 617 $ 781 Operating income 95 13 66 NSG sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our consolidated sales of NAND Flash products. (See "Operating Results by Product - NAND Flash" for further detail.) NSG sales for the first quarter of 2014 increased 3% from the fourth quarter of 2013 as increases in gigabits sold outpaced declines in average selling prices. Increases in gigabits sold for the first quarter of 2013 were primarily due to the continuing transition of our Singapore DRAM fabrication facility to NAND Flash. NSG sells a portion of its products to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. NSG sales to Intel under this arrangement were $101 million for the first quarter of 2014, $108 million for the fourth quarter of 2013 and $99 million for the first quarter of 2013. All other NSG products are sold to OEMs, resellers, retailers and other customers (including Intel), which we collectively refer to as "trade customers." NSG sales of NAND Flash products to trade customers for the first quarter of 2014 increased 5% as compared to the fourth quarter of 2013 primarily due to increases in gigabits sold partially offset by declines in average selling prices. NSG operating income for the first quarter of 2014 improved from the fourth quarter of 2013 as manufacturing cost reductions and decreases in R&D costs outpaced declines in average selling prices. Manufacturing cost reductions resulted primarily from improvements in product and process technologies. NSG sales of NAND Flash products to trade customers for the first quarter of 2014 increased 36% as compared to the first quarter of 2013 primarily due to an increase in gigabits sold partially offset by declines in average selling prices. NSG operating income for the first quarter of 2014 improved from the first quarter of 2013 as cost reductions outpaced declines in average selling prices. 38--------------------------------------------------------------------------------Embedded Solutions Group ("ESG") First Quarter Fourth Quarter 2014 2013 2013 Net sales $ 366 $ 278 $ 329 Operating income 66 78 63 In the first quarter of 2014, ESG sales were comprised of NAND Flash, DRAM and NOR Flash in decreasing order of revenue. ESG sales for the first quarter of 2014 increased 11% as compared to the fourth quarter of 2013 primarily due to increased sales volume of NAND Flash, NOR Flash and DRAM products as ESG continued to expand its customer base, partially offset by declines in average selling prices for NAND Flash and NOR Flash products. ESG operating income for the first quarter of 2014 was relatively unchanged from the fourth quarter of 2013 primarily due to decreases in average selling prices mitigated by cost reductions. ESG sales for the first quarter of 2014 increased as compared to the first quarter of 2013 primarily due to increased sales volume of NAND Flash, DRAM and NOR Flash products, partially offset by declines in average selling prices. ESG operating income for the first quarter of 2014 declined as compared to the first quarter of 2013 due to decreases in average selling prices mitigated by cost reductions. Operating Results by Product Net Sales by Product First Quarter Fourth Quarter % of net % of net % of net 2014 sales 2013 sales 2013 sales DRAM 2,794 69 % 720 39 % 1,652 58 % NAND Flash 1,058 26 % 803 44 % 980 34 % NOR Flash 145 4 % 228 12 % 173 6 % Other 45 1 % 83 5 % 38 2 % $ 4,042 100 % $ 1,834 100 % $ 2,843 100 % In order to balance our future product mix in anticipation of the closing of the Elpida transaction, in the fourth quarter of 2013 we began to transition production at our DRAM fabrication facility in Singapore from DRAM to NAND Flash. We expect this transition to NAND Flash production to be substantially completed by the end of 2014 and result in a marginal reduction in wafer production during the period of this transition. DRAM First Quarter 2014 Versus Fourth Quarter First Quarter For the year ended 2013 2013 (percentage change from prior period) Net sales 69 % 288 % Average selling prices per gigabit 0 % 10 % Gigabits sold 69 % 253 % Cost per gigabit (11 )% (27 )% 39-------------------------------------------------------------------------------- The increase in gigabit sales of DRAM products for the first quarter of 2014 as compared to the fourth quarter and first quarters of 2013 was primarily due to higher production volumes resulting from the acquisition of Elpida and improved product and process technologies, partially offset by the transition of the DRAM fabrication facility in Singapore from DRAM to NAND Flash. The increase in gigabit sales of DRAM products for the first quarter of 2014 as compared to the first quarter of 2013 also reflected increased output obtained from our Inotera joint venture under a new supply agreement effective in the second quarter of 2013. Effective on January 1, 2013, we entered into the new Inotera Supply Agreement under which we purchase substantially all of Inotera's output at a purchase price based on a discount from market prices for our comparable components. Prior to the new Inotera Supply Agreement we had the right to purchase 50% of Inotera's wafer production capacity based on a margin-sharing formula among Nanya, Inotera and us. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Equity Method Investments" note.) Our cost of product purchased from Inotera under these supply agreements was $587 million for the first quarter of 2014, $518 million for the fourth quarter of 2013 and $201 million for the first quarter of 2013. Our cost of product purchased from Inotera has increased since the beginning of calendar 2013 and was higher than our cost of similar products manufactured in our wholly-owned facilities in the first quarter of 2013 and fourth quarter of 2013. DRAM products acquired from Inotera accounted for 34% of our DRAM gigabit production for the first quarter of 2014 as compared to 50% for the fourth quarter of 2013 and 49% for the first quarter of 2013. Our gross margin percentage on sales of DRAM products for the first quarter of 2014 improved from the fourth quarter of 2013 primarily due to an increase in volume of products resulting from the acquisition of Elpida and a shift in product mix, including a higher volume of wafer sales. Our gross margin percentage on sales of DRAM products for the first quarter of 2014 improved from the first quarter of 2013 primarily due to the acquisition of Elpida, manufacturing cost reductions and higher average selling prices. We expect that our gigabit production and sales volumes of DRAM products will increase significantly in 2014 as compared to 2013 due to our acquisition of Elpida. Elpida has 300mm wafer fabrication facilities in Japan and Taiwan that are dedicated to the production of DRAM products. In the first quarter of 2014, DRAM products produced by the acquired Elpida facilities constituted 56% of our aggregate DRAM gigabit production. In accounting for the Elpida acquisition, Elpida's inventories were recorded at fair value, based on their estimated future selling prices, estimated costs to complete and other factors, which was approximately $200 million higher than the cost of inventory recorded by Elpida prior to the acquisition. Of this amount, approximately $111 million was included in cost of goods sold for the first quarter of 2014 and $41 million was included in costs of goods sold for the fourth quarter of 2013. NAND Flash We sell a portion of our output of NAND Flash products to Intel through IMFT at long-term negotiated prices approximating cost. (See "Operating Results by Business Segments - NAND Solutions Group" for further detail.) We sell the remainder of our NAND Flash products to trade customers. First Quarter 2014 Versus Fourth Quarter First Quarter For the year ended 2013 2013 (percentage change from prior period) Sales to trade customers: Net sales 10 % 36 % Average selling prices per gigabit (6 )% (8 )% Gigabits sold 17 % 48 % Cost per gigabit (7 )% (20 )% Increases in NAND Flash gigabits sold to trade customers for the first quarter of 2014 as compared to the fourth and first quarters of 2013 were primarily due to the transition of the DRAM facility in Singapore to NAND Flash production and improved product and process technologies. Our gross margin percentage on sales of NAND Flash products for the first quarter of 2014 improved from the fourth and first quarters of 2013 as manufacturing cost reductions outpaced declines in average selling prices. Manufacturing cost reductions for the first quarter of 2014 as compared to the fourth and first quarters of 2013 reflect improvements in product and process technologies. 40 --------------------------------------------------------------------------------NOR Flash Sales of NOR Flash products for the first quarter of 2014 declined as compared to the fourth and first quarters of 2013 primarily due to decreases in sales of wireless products as a result of the continued transition of wireless applications to NAND Flash products, which led to significant declines in average selling prices. Our gross margin percentage on sales of NOR Flash products for the first quarter of 2014 improved as compared to the fourth quarter of 2013 primarily due to cost reductions partially offset by declines in average selling prices. Our gross margin percentage on sales of NOR Flash products for the first quarter of 2014 declined as compared to the first quarter of 2013 primarily due to decreases in average selling prices partially offset by cost reductions. Operating Expenses and Other Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the first quarter of 2014 decreased 9% as compared to fourth quarter of 2013 primarily due to a reduction in of consulting, legal and other costs incurred in connection with the acquisition of Elpida partially offset by the incremental costs associated with the Elpida operations. SG&A expense for the first quarter of 2014 increased 48% as compared to first quarter of 2013 primarily due to the incremental costs associated with the Elpida operations and higher payroll costs resulting primarily from the reinstatement of variable pay plans. We expect that SG&A expenses will approximate $185 million to $195 million for the second quarter of 2014. Research and Development R&D expenses for the first quarter of 2014 increased 20% from the fourth quarter of 2013 primarily due to the incremental costs associated with the Elpida operations. R&D expenses for the first quarter of 2014 increased 43% from the first quarter of 2013 primarily due to the incremental costs associated with the Elpida operations and lower reimbursements from Nanya under partnering arrangements. The April 6, 2012 agreements with Intel expanded our NAND Flash R&D cost-sharing agreement to include certain emerging memory technologies, but did not change the cost-sharing percentage. As a result of amounts reimbursable from Intel, R&D expenses were reduced by $29 million for the first quarter of 2014, $28 million for the fourth quarter of 2013 and $32 million for the first quarter of 2013. Pursuant to a cost-sharing arrangement with Nanya effective through December 31, 2012, our R&D costs were reduced by $15 million in the first quarter of 2013. Nanya ceased participating in the joint development program in the second quarter of 2013. We expect that R&D expenses, net of amounts reimbursable from our R&D partners, will be approximately $355 million to $365 million for the second quarter of 2014. Our process technology R&D efforts are focused primarily on development of successively smaller line-width process technologies which are designed to facilitate our transition to next generation memory products. Additional process technology R&D efforts focus on the enablement of advanced computing and mobile memory architectures, the investigation of new opportunities that leverage our core semiconductor expertise and the development of new manufacturing materials. Product design and development efforts include our high density DDR3 and DDR4 DRAM and Mobile Low Power DDR DRAM products as well as high density and mobile NAND Flash memory (including multi-level and triple-level cell technologies), NOR Flash memory, specialty memory, solid-state drives, Hybrid Memory Cubes and other memory technologies and systems. 41 --------------------------------------------------------------------------------Restructure and Asset Impairments First Quarter Fourth Quarter 2014 2013 2013 Gain on termination of lease to Transform $ - $ (25 ) $ - Other (3 ) 4 32 $ (3 ) $ (21 ) $ 32 Other restructure costs for the fourth quarter of 2013 included $17 million of costs incurred in connection with a global workforce reduction. Other restructure costs for the fourth quarter of 2013 also included $14 million for the write down of certain assets in connection with our plans to discontinue 200mm production in Israel and sell the facility. As of November 28, 2013 and August 29, 2013, we had accrued $1 million and $12 million, respectively, for unpaid other restructure activities related to workforce optimization activities. As of November 28, 2013, we do not anticipate incurring any significant additional costs for these restructure activities. Interest Income (Expense) Interest expense for the first quarter of 2014, fourth quarter of 2013 and first quarter of 2013, included aggregate amounts of amortization of debt discount and other interest amortization expense of $51 million, $35 million and $29 million, respectively. Interest expense for the first quarter of 2014 included $17 million of "make-whole premiums" in connection with a series of debt restructure transactions with holders of our 2027 Notes, 2031A Notes and 2031B Notes. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt" note.) Income Taxes Income taxes for the first quarter of 2014 included a tax provision of $73 million primarily related to the utilization of deferred tax assets as a result of Elpida's operations. Remaining taxes for the first quarters of 2014 and 2013 primarily reflect taxes on our non-U.S. operations. We have a valuation allowance for our net deferred tax asset associated with our U.S. operations. The provision (benefit) for taxes on U.S. operations in the first quarters of 2014 and 2013 was substantially offset by changes in the valuation allowance. Equity in Net Income (Loss) of Equity Method Investees We recognize our share of earnings or losses from these entities under the equity method, generally on a two-month lag. Equity in net loss of equity method investees, net of tax, included the following: First Quarter Fourth Quarter 2014 2013 2013 Inotera $ 84 $ (53 ) $ 42 Tera Probe 2 - - Other - 1 (5 ) $ 86 $ (52 ) $ 37 Our equity in net income (loss) of Inotera improved for the first quarter 2014 as compared to the first and fourth quarters of 2013 primarily due to Inotera's improved operating results as a result of higher average selling prices and lower manufacturing costs. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Equity Method Investments.") Other In December 2013, subsequent to the end of our first fiscal quarter of 2014, we settled all pending litigation between us and Rambus, including all antitrust and patent matters and entered into a patent cross-license agreement. As a result, other operating expense for the quarter ended November 28, 2013 included a $233 million charge to accrue a liability, which reflects the discounted value of amounts due under this arrangement. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Contingencies" note for further detail.) 42-------------------------------------------------------------------------------- We recognized a $75 million loss in other non-operating expense from the restructure of debt in the first quarter of 2014 and estimate that we will recognize an additional $68 million of losses in the second quarter of 2014 for these transactions. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt" note.) Further discussion of other operating and non-operating income and expenses can be found in the following notes contained in "Item 1. Financial Statements - Notes to Consolidated Financial Statements": • Equity Plans • Other Operating (Income) Expense, Net • Other Non-Operating Income (Expense), Net Liquidity and Capital Resources As of November 28, 2013 August 29, 2013 Cash and equivalents and short-term investments: Money market funds $ 1,677 $ 1,188 Bank deposits 1,429 1,619 Certificates of deposit 551 47 Corporate bonds 112 112 Commercial paper 63 61 Government securities 37 72 Asset-backed securities 1 2 $ 3,870 $ 3,101 Long-term marketable investments $ 538 $ 499 Restricted cash: Current $ - $ 556 Noncurrent (included in "Other noncurrent assets") 65 63 $ 65 $ 619 Cash and equivalents and short-term investments as of November 28, 2013 included $1,402 million held by Elpida and its subsidiaries. Substantially all of our restricted cash is held by Elpida for its installment payments to its secured and unsecured creditors. Use of cash and equivalents and restricted cash held by Elpida is subject to limitations described below. As a result of the corporate reorganization proceedings of the Elpida Companies entered into in March 2012 and for so long as such proceedings are continuing, the Elpida Companies and their subsidiaries are subject to certain restrictions on dividends, loans and advances. The plans of reorganization of the Elpida Companies prohibit the Elpida Companies from paying dividends, including any cash dividends, to us and require that excess earnings be used in their businesses or to fund the Elpida Companies' installment payments. These prohibitions would also effectively prevent the subsidiaries of the Elpida Companies from paying cash dividends to us as any such dividends would have to be first paid to the Elpida Companies which are prohibited from repaying those amounts to us as dividends under the plans of reorganization. In addition, pursuant to an order of the Japan Court, the Elpida Companies cannot make loans or advances, other than certain ordinary course advances, to us without the consent of the Japan Court. Moreover, loans or advances by subsidiaries of the Elpida Companies may be considered outside of the ordinary course of business and subject to approval of the legal trustees and Japan Court. As a result, the assets of the Elpida Companies and their subsidiaries, while available to satisfy the Elpida Companies' installment payments and the other obligations, capital expenditures and other operating needs of the Elpida Companies and their subsidiaries, are not available for use by us in our other operations. Moreover, certain uses of the assets of the Elpida Companies, including investments in certain capital expenditures and in MMT, may require consent of Elpida's trustees and/or the Japan Court. 43 -------------------------------------------------------------------------------- Cash and equivalents in the table above included $105 million held by IMFT as of November 28, 2013 and $62 million as of August 29, 2013. Our ability to access funds held by IMFT to finance our other operations is subject to agreement by the other member and contractual limitations. Amounts held by IMFT are not anticipated to be available to finance our other operations. As of November 28, 2013, $2,030 million of our cash and equivalents and short-term investments was held by foreign subsidiaries, of which $579 million was denominated in currencies other than the U.S. dollar. As of November 28, 2013, we had $1,789 million of cash and equivalents and short-term investments that was held by foreign subsidiaries whose earnings were considered to be indefinitely reinvested and repatriation of these funds to the U.S. would subject these funds to U.S. federal income taxes. To mitigate credit risk, we invest through high-credit-quality financial institutions and, by policy, generally limit the concentration of credit exposure by restricting investments with any single obligor. Cash generated by operations is our primary source of liquidity. Our liquidity is highly dependent on selling prices for our products and the timing and level of our capital expenditures, both of which can vary significantly from period to period. Depending on conditions in the semiconductor memory market, our cash flows from operations and current holdings of cash and investments may not be adequate to meet our needs for capital expenditures and operations. In 2013, we obtained $1,121 million of proceeds from issuance of debt and $126 million of proceeds from equipment sale-leaseback financing. As of November 28, 2013, we had credit facilities available that provides for up to $408 million of additional financing, subject to outstanding balances of trade receivables and other conditions. We expect our cash and investments, cash flows from operations and available financing will be sufficient to meet our requirements at least through the next 12 months. On December 31, 2013, our 2014 Notes met the criteria to be called for redemption by us. If the holders of the notes convert and we elect to settle entirely in cash, based on the $21.17 price of our common stock as of November 28, 2013, such settlement amount would be approximately $722 million, which exceeds the face amount of the 2014 Notes by $237 million. Holders of our outstanding convertible notes can convert the notes during any calendar quarter if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price. We estimate that we will make aggregate payments in the second quarter of 2014 of approximately $618 million to settle our obligations in connection with the conversion of our 2027 Notes and 2031A Notes. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt.") Excluding these 2027 Notes and 2013A Notes, as of November 28, 2013, convertible notes with an aggregate principal amount of $740 million, contained contractual terms that require us to pay cash up to the principal amount of the notes upon conversion. All of these notes met the conversion criteria for the calendar quarter beginning after December 31, 2013. We are continuously evaluating alternatives for efficiently financing our capital expenditures and operations and optimizing our balance sheet. We have engaged in the past, and we expect from time to time in the future to engage, in a variety of transactions for such purposes, including the issuance or incurrence of secured and unsecured debt and the refinancing and restructuring of existing debt, including our convertible notes, through exchanges, repurchases, redemptions and conversions. We have used substantial amounts of cash in recent periods in connection with repurchases and conversions of convertible notes, and we expect to use substantial additional amounts of our cash in the future in connection with such transactions, including with respect to our 1.875% convertible senior notes due 2014 scheduled to mature in June 2014. Operating Activities Net cash provided by operating activities was $1,507 million for the first quarter of 2014, due primarily to a strong market for our products and our continued focus on cost-efficient operations. Operating cash flows in the first quarter of 2014 also benefitted by approximately $250 million of receipts from a customer for product to be supplied through September 2016, but was adversely affected by approximately $315 million as a result of a change in payment terms for some customers of our Elpida operations. Investing Activities Net cash provided by investing activities was $21 million for the first quarter of 2014, which consisted primarily of $534 million of restricted cash used for the first Elpida creditor installment payment offset by cash expenditures of $526 million for property, plant and equipment. 44 -------------------------------------------------------------------------------- We believe that to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, we must continue to invest in manufacturing technologies, facilities and capital equipment and R&D. We estimate that capital spending for 2014 will be approximately $2.6 billion to $3.2 billion. The actual amounts for 2014 will vary depending on market conditions. As of November 28, 2013, we had commitments of approximately $875 million for the acquisition of property, plant and equipment, of which $700 million is expected to be paid within one year. Financing Activities Net cash used for financing activities was $735 million for the first quarter of 2014, which included $737 million for repayments of debt and $143 million of payments on equipment purchase contracts, which was partially offset by $144 million of proceeds from issuance of common stock under equity plans. As of November 28, 2013, under the terms and conditions of the Elpida Companies' respective plans of reorganization, we are obligated to pay 142 billion yen (or the equivalent of $1,388 million based on exchange rates as of November 28, 2013) to the external creditors of the Elpida Companies. In October 2013, we made the first installment payments of $534 million to the external creditors of the Elpida Companies from funds that had been held in a restricted cash account since the acquisition date. The remaining payments are payable at the end of each calendar year beginning in 2014 through 2019. In order to further the planned technology road maps for the Elpida and MMT operations, we will be required to make capital expenditures. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Elpida Memory, Inc.") In November 2013, we entered into the following series of debt restructure transactions with certain holders of our convertible notes: •Exchanged approximately $80 million in aggregate principal amount of our 2027 Notes, $155 million in aggregate principal amount of our 2031A Notes and $205 million in aggregate principal amount of our 2031B Notes for $1,025 million in aggregate principal amount at maturity of new 3.00% Convertible Senior Notes due 2043; •Gave notice of our election to terminate the right of note holders to convert the remaining 2027 Notes into cash and shares of our common stock effective as of December 13, 2013. In the second quarter of 2014, the entire $95 million of principal amount of the 2027 Notes had been converted by holders which we settled the conversion in cash for $179 million; and •Gave notice of our election to redeem all remaining 2031A Notes on December 7, 2013. In the second quarter of 2014, the entire $190 million of principal amount of the 2031A Notes had been converted by holders and we are obligated to settle the conversion in cash for an estimated $439 million. On December 20, 2013, we issued $462 million in aggregate principal amount of 1.258% Secured Notes Due 2019 (the "2019 Notes"). Principal is payable in equal semi-annual installments, commencing on July 15, 2014. Interest is payable in January and July of each year. The Export-Import Bank of the United States ("Ex-Im Bank") guaranteed payment of all regularly scheduled installment payments of principal of, and interest on, the 2019 Notes. We paid $23 million to Ex-Im Bank for their guarantee upon issuance of the 2019 Notes. The Notes are collateralized by certain equipment. Contractual Obligations Payments Due by Period As of November Remainder of 2019 and 28, 2013 Total 2014 2015 2016 2017 2018 Thereafter Notes payable (1) $ 6,379 $ 1,177 $ 445 $ 428 $ 392 $ 585 $ 3,352 Capital lease obligations (1) 1,208 292 354 305 84 40 133 Operating leases(2) 118 18 18 16 13 11 42 Total $ 7,705 $ 1,487 $ 817 $ 749 $ 489 $ 636 $ 3,527 (1) Amounts include Elpida Creditor Installment Payments, convertible notes and other notes and reflects principal and interest cash payments over the life of the obligations, including anticipated interest payments that are not recorded on our consolidated balance sheet. Notes payable amounts in the table do not include any conversion values in excess of principal amounts. Any future redemption or conversion of convertible debt could impact the timing and amount of our cash payments. (2) Amounts do not include contingent payments. 45 --------------------------------------------------------------------------------Recently Issued Accounting Standards There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on our financial statements. |