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MICRON TECHNOLOGY INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 Expenses and Other" regarding SG&A and R&D expenses for the first quarter of 2015 and future Restructure and Asset Impairment costs; and in "Liquidity and Capital Resources" regarding our pursuit of additional financing and debt restructuring, regarding the use of cash on hand to fund any repurchases of common stock, regarding the sufficiency of our cash and investments, cash flows from operations and available financing to meet our requirements for at least the next 12 months, regarding capital spending in 2015 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 "Part I, Item 1A. Risk Factors." This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended August 28, 2014. 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, 2013 and 2012 each contained 52 weeks. Our fiscal 2015 will contain 53 weeks and the first quarter of fiscal 2015 will contain 14 weeks. All production data includes the production of IMFT and Inotera. All tabular dollar amounts are in millions. Our Management's Discussion and Analysis ("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: 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. • Off-Balance Sheet Arrangements: Description of off-balance sheet arrangements. • Critical Accounting Estimates: Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. Overview For an overview of our business, see "Item 1 - Business - Overview." Our results of operations for 2014 were affected by the following key transaction. Acquisition of Micron Memory Japan, Inc. On July 31, 2013, we completed the MMJ Acquisition, in which we acquired Elpida, now known as MMJ, and a controlling interest in Rexchip, now known as MMT. In 2014, we purchased additional interests in MMT, increasing our ownership interest to 99.5%. In connection with the MMJ Acquisition, we recorded net assets of $2.60 billion, noncontrolling interests of $168 million and a gain on the transaction of $1.48 billion in 2013. In the second quarter of 2014, the provisional amounts recorded in connection with the MMJ Acquisition were adjusted, primarily for pre-petition liabilities. As a result, other non-operating expense for 2014 included these measurement period adjustments of $33 million. (See "Item 8. Financial Statements - Notes to Consolidated Financial Statements - Micron Memory Japan, Inc." note.) The MMJ Acquisition included a 300mm DRAM wafer fabrication facility located in Hiroshima, Japan, a 300mm DRAM wafer fabrication facility in Taichung City, Taiwan and an assembly and test facility located in Akita, Japan. These wafer fabrication facilities together represented approximately 30% of our total wafer capacity for 2014. The MMJ Group's products include mobile DRAM targeted to mobile phones and tablets, and computing DRAM targeted to desktop PCs, servers, notebooks and workstations. The operations from the MMJ Acquisition are included primarily in the MBU and CNBU segments. 30 -------------------------------------------------------------------------------- Results of Operations Consolidated Results For the year ended 2014 2013 2012 Net sales $ 16,358 100 % $ 9,073 100 % $ 8,234 100 % Cost of goods sold 10,921 67 % 7,226 80 % 7,266 88 % Gross margin 5,437 33 % 1,847 20 % 968 12 % SG&A 707 4 % 562 6 % 620 8 % R&D 1,371 8 % 931 10 % 918 11 % Restructure and asset impairments 40 - % 126 1 % 10 - % Other operating (income) expense, net 232 1 % (8 ) - % 32 - % Operating income (loss) 3,087 19 % 236 3 % (612 ) (7 )% Gain on MMJ Acquisition (33 ) - % 1,484 16 % - - % Interest income (expense), net (329 ) (2 )% (217 ) (2 )% (171 ) (2 )% Other non-operating income (expense), net 8 - % (218 ) (2 )% 29 - % Income tax (provision) benefit (128 ) (1 )% (8 ) - % 17 - % Equity in net income (loss) of equity method investees 474 3 % (83 ) (1 )% (294 ) (4 )% Net income attributable to noncontrolling interests (34 ) - % (4 ) - % (1 ) - % Net income (loss) attributable to Micron $ 3,045 19 % $ 1,190 13 % $ (1,032 ) (13 )% Business Segments We have the following four business units, which are our reportable segments: Compute and Networking Business Unit ("CNBU"): Includes DRAM and NOR Flash products sold to the compute, networking, graphics and cloud server markets. Mobile Business Unit ("MBU"): Includes DRAM, NAND Flash and NOR Flash products sold to the smartphone, feature phone and tablet mobile-device market. Storage Business Unit ("SBU"): Includes NAND Flash components and SSDs sold into enterprise and client storage, cloud and removable storage markets. SBU also includes NAND Flash products sold to Intel through our IMFT joint venture. Embedded Business Unit ("EBU"): Includes DRAM, NAND Flash and NOR Flash products sold into automotive and industrial applications, as well as the connected home and consumer electronics markets. Our other operations do not meet the thresholds of a reportable segment and are reported under All Other. In the third quarter of 2014, we reorganized our business units. All prior period amounts reflect this reorganization. Net Sales For the year ended 2014 2013 2012 CNBU $ 7,333 45 % $ 3,462 38 % $ 2,667 32 % MBU 3,627 22 % 1,214 13 % 1,176 14 % SBU 3,480 21 % 2,824 31 % 2,842 35 % EBU 1,774 11 % 1,275 14 % 1,097 13 % All Other 144 1 % 298 4 % 452 6 % $ 16,358 100 % $ 9,073 100 % $ 8,234 100 % 31-------------------------------------------------------------------------------- Total net sales for 2014 increased 80% as compared to 2013 primarily due to higher CNBU and MBU sales resulting from the MMJ Acquisition. Net sales for all segments in 2014 also benefitted, as compared to 2013, from increases in DRAM and NAND Flash sales volumes driven primarily by higher manufacturing output as a result of improvements in product and process technology and an increased share of output from Inotera. Total net sales for 2013 increased 10% as compared to 2012 reflecting increases in CNBU, EBU and MBU sales primarily due to higher levels of DRAM and NAND Flash gigabit sales volumes partially offset by declines in average selling prices. The increases in gigabit sales volumes for 2013 were primarily attributable to manufacturing efficiencies driven by improvements in product and process technologies, increased DRAM supply from Inotera due to the restructuring of our supply agreement and $355 million of DRAM sales from the MMJ Acquisition after its acquisition on July 31, 2013. Gross Margin Our overall gross margin percentage improved to 33% for 2014 from 20% for 2013 primarily due to improvements in the gross margin percentage for CNBU and MBU as a result of higher margins for DRAM products. The gross margin improvements for CNBU and MBU for 2014 as compared to 2013 resulted primarily from the MMJ Acquisition, manufacturing cost reductions and higher average selling prices for CNBU. Through December 2012, we purchased 50% of Inotera's wafer production capacity based on a margin-sharing formula among Nanya, Inotera and us. Since January 2013, we have purchased substantially all of Inotera's DRAM output at a discount from market prices for our comparable components under a new supply agreement (the "Inotera Supply Agreement"). Our costs for supply from Inotera increased in 2014 from 2013 due to increases in average selling prices for our DRAM products and the changes in the pricing terms. The Inotera Supply Agreement has a three-year term (currently through December 2016) that contemplates annual negotiations with respect to potential successive one-year extensions. If the parties do not agree to an extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down period. In the event of a wind-down, our share of Inotera's capacity would decline over the wind-down period. In 2014, our cost of products purchased from Inotera was significantly higher than our cost of similar products manufactured in our wholly-owned facilities. We are currently in negotiations regarding the extension of the Inotera Supply Agreement. There can be no assurance that we will be able to reach an agreement. Under the Inotera supply agreements, we purchased $2.68 billion, $1.26 billion, and $646 million of DRAM products in 2014, 2013 and 2012, respectively. Our gross margin percentage on sales of DRAM products for 2014 improved from 2013 primarily due to reductions in costs and increases in average selling prices. Cost reductions for 2014 primarily reflected improvements in product and process technologies and the comparatively lower manufacturing costs of the MMJ Group, partially offset by higher costs for product obtained under the Inotera supply agreements. For 2014 and the fourth quarter of 2013, our costs of goods sold for DRAM products included the sale of the MMJ Group's inventories recorded at fair value in the MMJ Acquisition, which was higher than the manufacturing cost of such inventories. This increased our costs of goods sold by approximately $153 million for 2014 and $41 million for 2013. Our overall gross margin percentage improved to 20% for 2013 from 12% for 2012 due to improvements in the gross margin percentage for CNBU, and to a lesser extent EBU, SBU and MBU, primarily due to manufacturing cost reductions partially offset by declines in average selling prices. Manufacturing cost reductions for 2013 primarily resulted from improvements in product and process technologies. Operating Results by Business Segments CNBU For the year ended 2014 2013 2012 Net sales $ 7,333 $ 3,462 $ 2,667 Operating income (loss) 1,957 160 (458 ) 32-------------------------------------------------------------------------------- CNBU 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.) CNBU sales for 2014 increased 112% as compared to 2013 primarily due to (1) the MMJ Acquisition, (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 technologies. CNBU sales for 2014 as compared to 2013 were adversely impacted by the transition of production at one of our Singapore wafer fabrication facilities from DRAM to NAND Flash. CNBU operating income for 2014 improved from 2013 primarily due to the MMJ Acquisition, higher average selling prices and manufacturing cost reductions. CNBU sales for 2013 increased 30% as compared to 2012 primarily due to increases in gigabits sold partially offset by declines in average selling prices. CNBU operating margin for 2013 improved from 2012 primarily due to manufacturing cost reductions as a result of improved product and process technologies partially offset by declines in average selling prices. CNBU results of operations for 2013 included sales of $153 million and operating income of $21 million from the acquired MMJ Group. CNBU sales and operating margins for 2012 were adversely impacted by a $58 million charge for a settlement with a customer. MBU For the year ended 2014 2013 2012 Net sales $ 3,627 $ 1,214 $ 1,176 Operating income (loss) 683 (265 ) (371 ) In 2014, MBU 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. MBU sales for 2014 increased 199% as compared to 2013 primarily due significant increases in mobile DRAM sales as a result of the MMJ Acquisition. MBU operating margin for 2014 also improved from 2013 primarily due to the MMJ Acquisition and manufacturing cost reductions, which significantly outpaced declines in average selling prices. MBU sales increased 3% for 2013 as compared to 2012 primarily due to higher sales of mobile DRAM products as a result of the MMJ Acquisition partially offset by declines in sales of wireless NOR Flash products. MBU results of operations for 2013 included sales of $192 million and operating income of $22 million from the MMJ Group. Sales of wireless NOR Flash products declined in 2014 as a result of weakness in market demand and our customer group in particular, as well as a continued transition by customers to NAND Flash. The improvement in MBU operating margin for 2013 from 2012 was primarily due to reductions in manufacturing, SG&A and R&D costs. SBU For the year ended 2014 2013 2012 Net sales $ 3,480 $ 2,824 $ 2,842 Operating income 255 173 199 SBU sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our sales of NAND Flash products. (See "Operating Results by Product - NAND Flash" for further detail.) SBU sales for 2014 increased 23% from 2013 primarily due to increases in gigabits sold partially offset by declines in average selling prices. Increases in gigabits sold for 2014 were primarily due to the transition in 2014 of production at one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash and improvements in product and process technologies. SBU sells a portion of its products to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. SBU sales of NAND Flash products to Intel under this arrangement were $423 million, $387 million and $718 million for 2014, 2013 and 2012, respectively. All other SBU products are sold to OEMs, resellers, retailers and other customers (including Intel), which we collectively refer to as "trade customers." SBU sales of NAND Flash products to trade customers for 2014 increased 26% as compared to 2013 primarily due to an increase in gigabits sold partially offset by declines in average selling prices. SBU operating income for 2014 improved from 2013 primarily due to higher gigabit sales volumes as manufacturing cost reductions were essentially offset by declines in average selling prices. 33 -------------------------------------------------------------------------------- SBU sales for 2013 were relatively unchanged from 2012 as increases in gigabits sold were partially offset by declines in average selling prices. Increases in gigabits sold for 2013 were primarily due to improvements in product and process technologies. SBU sales of NAND Flash products to trade customers for 2013 increased 22% as compared to 2012 primarily due to increases in gigabits sold partially offset by declines in average selling prices. On April 6, 2012, we acquired Intel's interests and supply rights from IM Flash wafer fabrication facilities in Singapore and Virginia, resulting in subsequent increases in our sales to trade customers. SBU operating income for 2013 declined from 2012 primarily due to decreases in average selling prices and increases in R&D costs mitigated by manufacturing cost reductions. Manufacturing cost reductions resulted primarily from improvements in product and process technologies. EBU For the year ended 2014 2013 2012 Net sales $ 1,774 $ 1,275 $ 1,097 Operating income 331 227 129 In 2014, EBU sales were comprised of DRAM, NAND Flash and NOR Flash in decreasing order of revenue. EBU sales for 2014 increased 39% as compared to 2013 primarily due to increased sales volumes of DRAM and NAND Flash products partially offset by declines in average selling prices. EBU operating income for 2014 improved as compared to 2013 primarily due to higher margins on sales of DRAM and NAND Flash products as a result of the increase in sales and cost reductions. In 2013, EBU sales were comprised of DRAM, NOR Flash and NAND Flash in decreasing order of revenue. EBU sales increased 16% for 2013 as compared to 2012 primarily due to increased sales volumes of DRAM, NAND Flash and NOR Flash products as EBU continued to expand its customer base, partially offset by declines in average selling prices. EBU operating income for 2013 improved from 2012 primarily due to manufacturing cost reductions and higher sales volumes partially offset by declines in average selling prices. Operating Results by Product Net Sales by Product For the year ended 2014 2013 2012 DRAM $ 11,164 68 % $ 4,361 48 % $ 3,178 39 % NAND Flash 4,468 27 % 3,589 40 % 3,627 44 % NOR Flash 505 3 % 792 9 % 977 12 % Other 221 2 % 331 3 % 452 5 % $ 16,358 100 % $ 9,073 100 % $ 8,234 100 % In order to balance our future product mix in anticipation of the closing of the MMJ Acquisition, in the fourth quarter of 2013, we began to transition production at one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash. This transition to NAND Flash production is substantially complete. During this period of transition, there was a marginal reduction in wafer production. DRAM For the year ended 2014 2013 (percentage change from prior period) Net sales 156 % 37 % Average selling prices per gigabit 6 % (11 )% Gigabits sold 142 % 55 % Cost per gigabit (20 )% (25 )% 34-------------------------------------------------------------------------------- The increase in gigabit sales of DRAM products for 2014 as compared to 2013 was primarily due to higher production volumes resulting from the MMJ Acquisition, increased supply under the new Inotera Supply Agreement and improved product and process technologies, partially offset by the transition of one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash. In 2014, DRAM products produced by our MMJ Group facilities constituted 54% of our aggregate DRAM gigabit production as compared to 9% in 2013. In 2014, our cost of products purchased from Inotera was significantly higher than our cost of similar products manufactured in our wholly-owned facilities and were higher than our costs in 2013. DRAM products acquired from Inotera accounted for 38% of our DRAM gigabit production for 2014 as compared to 54% for 2013 and 46% for 2012. Our gross margin percentage on sales of DRAM products for 2014 improved from 2013 primarily due to reductions in costs and increases in average selling prices. Cost reductions for 2014 primarily reflected improvements in product and process technologies and the comparatively lower manufacturing costs of the MMJ Group, partially offset by higher costs for product obtained under the Inotera supply agreement and the sale of the MMJ Group's inventories recorded in the MMJ Acquisition. The increase in gigabit sales of DRAM products for 2013 as compared to 2012 was primarily due to increased output obtained from our Inotera joint venture under the new supply agreement, improved product and process technologies and the MMJ Acquisition on July 31, 2013. Our gross margin percentage on sales of DRAM products for 2013 improved from 2012 primarily due to manufacturing cost reductions as a result of improvements in product and process technologies partially offset by declines in average selling prices. DRAM sales and gross margins for 2012 were adversely impacted by the effects of a $58 million charge to revenue for a settlement with a customer. 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 - Storage Business Unit" for further detail.) We sell the remainder of our NAND Flash products to trade customers. For the year ended 2014 2013 (percentage change from prior period) Sales to trade customers: Net sales 27 % 15 % Average selling prices per gigabit (23 )% (18 )% Gigabits sold 65 % 40 % Cost per gigabit (23 )% (22 )% Increases in NAND Flash gigabits sold to trade customers for 2014 as compared to 2013 were primarily due to the transition of one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash production and improved product and process technologies. Our gross margin percentage on sales of trade NAND Flash products for 2014 was relatively unchanged from 2013 as manufacturing cost reductions offset declines in average selling prices. Manufacturing cost reductions for 2014 as compared to 2013 primarily resulted from improvements in product and process technologies. Increases in NAND Flash gigabits sold to trade customers for 2013 as compared to 2012 were primarily due to improved product and process technologies, increased output available for sale to trade customers due to the restructure of our IM Flash agreement with Intel in April 2012 and the ramp-up of our fabrication facility in Singapore throughout 2012. Our gross margin percentage on sales of NAND Flash products for 2013 improved from 2012 as manufacturing cost reductions outpaced declines in average selling prices. Manufacturing cost reductions for 2013 as compared to 2012 reflect improvements in product and process technologies. NOR Flash Sales of NOR Flash products for 2014 declined as compared to 2013 primarily due to decreases in sales of wireless NOR Flash products as a result of the continued transition of wireless applications to NAND Flash products. Our gross margin percentage on sales of NOR Flash products for 2014 declined as compared to 2013 primarily due to costs of underutilized capacity in connection with the decrease in production of wireless products and decreases in average selling prices. 35-------------------------------------------------------------------------------- Sales of NOR Flash products for 2013 declined as compared to 2012 primarily due to decreases in sales of wireless NOR Flash products as a result of weakness in demand from certain customers and 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 2013 improved as compared to 2012 primarily due to cost reductions. Operating Expenses and Other Selling, General and Administrative SG&A expenses for 2014 increased 26% as compared to 2013 primarily due to the incremental costs resulting from the MMJ Acquisition and higher payroll costs resulting primarily from the reinstatement of variable pay plans. We expect that SG&A expenses will approximate $195 million to $205 million for the first quarter of 2015. SG&A expenses for 2013 decreased 9% as compared to 2012 primarily due to a reduction in legal costs and lower variable pay costs partially offset by $50 million of consulting and other costs incurred in connection with the MMJ Acquisition. Research and Development R&D expenses for 2014 increased 47% from 2013 primarily due to the incremental costs resulting from the MMJ Acquisition, higher payroll costs resulting primarily from the reinstatement of variable pay plans and increased resources dedicated to development efforts. We expect that R&D expenses, net of amounts reimbursable from our R&D partners, will be approximately $395 million to $405 million for the first quarter of 2015. R&D expenses for 2013 increased 1% from 2012 primarily due to lower reimbursements from Nanya under partnering arrangements offset by lower payroll costs primarily resulting from the suspension of variable pay plans and a lower volume of development wafers processed. As a result of amounts reimbursable from Intel under a joint development program for NAND Flash and certain emerging memory technologies, R&D expenses were reduced by $137 million, $127 million and $87 million for 2014, 2013 and 2012, respectively. As a result of amounts reimbursable from Nanya under a DRAM R&D joint development program, R&D expenses were reduced by $19 million and $138 million for 2013 and 2012, respectively. Effective January 1, 2013, Nanya ceased participating in the DRAM joint development program. 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, Mobile LPDRAM products, high density NAND Flash memory (including 3D NAND and MLC and TLC technologies), SSDs, Hybrid Memory Cubes, specialty memory, NOR Flash memory, and other memory technologies and systems. Restructure and Asset Impairments For the year ended 2014 2013 2012 Loss on impairment of LED assets $ (6 ) $ 33 $ - Loss on impairment of MIT assets (5 ) 62 - Gain on termination of lease to Transform - (25 ) - Loss on restructure of ST consortium agreement - 26 - Other 51 30 10 $ 40 $ 126 $ 10 36-------------------------------------------------------------------------------- In order to optimize operations, improve efficiency and increase our focus on our core memory operations, we have entered into various restructure activities. For 2014 and 2013, other restructure included charges associated with our efforts to wind down our 200mm operations primarily in Agrate, Italy and Kiryat Gat, Israel and charges associated with workforce optimization activities, primarily related to our MBU and EBU operating segments. As of August 28, 2014, we had accrued $14 million for unpaid other restructure activities related to our workforce optimization activity. As of August 28, 2014, we do not anticipate incurring any significant additional costs for these restructure activities. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Restructure and Asset Impairments.") Interest Income (Expense) Net interest expense for 2014, 2013 and 2012, included aggregate amounts of amortization of debt discount and other costs of $167 million, $122 million and $81 million, respectively. Income Taxes Income tax provision (benefit) for 2014 included $249 million of expenses related to the utilization of deferred tax assets by the MMJ Group partially offset by a $190 million benefit from increases in amount of MMJ Group's deferred tax assets expected to be realized based on our forecasted utilization of net operating losses. The remaining tax provision for 2014 primarily reflects taxes on our other non-U.S. operations. The provision (benefit) for taxes on U.S. operations for 2014 was substantially offset by changes in the valuation allowance. As of August 28, 2014, we had valuation allowances of $1.29 billion against substantially all U.S. net deferred tax assets and $1.15 billion related to our foreign subsidiaries, primarily related to net operating loss carryforwards. Our valuation allowance decreased $712 million for 2014 primarily due to the utilization of U.S. and foreign net operating losses and due to the $190 million benefit to deferred tax assets of the MMJ Group. The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases. Management continues to evaluate future financial performance to determine whether such performance is sufficient evidence to support reversal of the valuation allowances. Our unrecognized tax benefits increased $150 million in 2014, primarily due to transfer pricing and other matters, which was substantially offset by changes in our deferred tax asset valuation allowance. We currently operate in several tax jurisdictions where we have arrangements that allow us to compute our tax provision at rates below the local statutory rates that expire in whole or in part at various dates through 2026. These arrangements benefitted our tax provision in 2014, 2013 and 2012 by $286 million, $141 million and $52 million, respectively. Income taxes for 2013 and 2012 primarily reflect taxes on our non-U.S. operations offset by benefits of $19 million and $56 million, respectively, from the favorable resolution of prior year tax matters and a change in tax laws applicable to prior years. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Income Taxes.") Equity in Net Income (Loss) of Equity Method Investees We recognize our share of earnings or losses from the entities listed below under the equity method, generally on a two-month lag. Equity in net income (loss) of equity method investees, net of tax, included the following: For the year ended 2014 2013 2012 Inotera $ 465 $ (79 ) $ (189 ) Tera Probe 11 - - Other (2 ) (4 ) (105 ) $ 474 $ (83 ) $ (294 ) Our equity in net income (loss) of Inotera improved for 2014 as compared to 2013 primarily due to Inotera's improved operating results as a result of higher selling prices and lower manufacturing costs. Higher selling prices resulted from the new Inotera Supply Agreement coupled with an improved market. Losses in 2012 for our other equity method investments were primarily attributable to Transform Solar Pty Ltd. As of August 30, 2012, Transform's operations were substantially discontinued. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Equity Method Investments.") 37 --------------------------------------------------------------------------------Other Operating and Non-Operating In 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 2014 included a $233 million charge to accrue a liability, which reflects the discounted value of amounts due under this arrangement. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Contingencies" note.) Other non-operating expense for 2014 included losses from the restructure of our debt of $184 million. Other non-operating expense for 2013 included losses of $31 million from the restructure of our debt. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt" note.) Other non-operating expense included losses from changes in currency exchange rates of $28 million, $229 million and $6 million for 2014, 2013 and 2012, respectively. The loss for 2013 includes a $228 million loss for currency contracts to hedge our yen-denominated obligations in connection with the MMJ Acquisition. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Derivative Instruments" note.) On August 15, 2014, ON Semiconductor Corporation acquired Aptina for approximately $433 million and we recognized a non-operating gain of $119 million on the sale of our shares based on our diluted ownership interest of approximately 27%. On May 15, 2014, Inotera issued 400 million common shares in a public offering at a price equal to 31.50 New Taiwan dollars per share, which was in excess of our carrying value per share. As a result of the issuance, our ownership interest decreased from 35% to 33% and we recognized a non-operating gain of $93 million in 2014. Further discussion of other operating and non-operating income and expenses can be found in the following notes contained in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements": • Equity Plans • Other Operating (Income) Expense, Net • Other Non-Operating Income (Expense), Net Liquidity and Capital Resources Our primary sources of liquidity are cash generated from operations and financing obtained from capital markets. Specifically, in 2014, we generated cash from operations of $5.70 billion and obtained $2.21 billion of proceeds from issuance of debt. Cash generated from operations is highly dependent on selling prices for our products, which can vary significantly from period to period. We are continuously evaluating alternatives for efficiently financing our capital expenditures, dilution-management activities (including repurchases of convertible notes or equity) and ongoing operations. 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. On October 27, 2014, we announced that our Board of Directors authorized the discretionary repurchase of up to $1.00 billion of our outstanding common stock. Any repurchases under the new authorization may be made in open market purchases, block trades, privately negotiated transactions and/or derivative transactions, subject to market conditions and our ongoing determination that it is the best use of available cash. We expect to use cash on hand to fund any repurchases. The repurchase authorization does not obligate us to acquire any common stock. We expect that our cash and investments, cash flows from operations and available financing will be sufficient to meet our requirements at least through 2015. 38 -------------------------------------------------------------------------------- As of 2014 2013 Cash and equivalents and short-term investments: Bank deposits $ 2,445 $ 1,619 Money market funds 1,281 1,188 Certificates of deposit 410 47 Corporate bonds 154 112 Government securities 136 72 Commercial paper 107 61 Asset-backed securities 1 2 $ 4,534 $ 3,101 Long-term marketable investments $ 819 $ 499 As of August 28, 2014, $2.80 billion of our cash and equivalents and short-term investments was held by foreign subsidiaries, of which $758 million was denominated in currencies other than the U.S. dollar. To mitigate credit risk, we invest through high-credit-quality financial institutions and, by policy, generally limit the concentration of credit exposure by restricting the amount of investments with any single obligor. Limitations on the Use of Cash and Investments MMJ Group: Cash and equivalents and short-term investments in the table above included an aggregate of $1.60 billion held by the MMJ Group as of August 28, 2014. As a result of the corporate reorganization proceedings of the MMJ Companies entered into in March 2012 and for so long as such proceedings are continuing, the MMJ Companies and their subsidiaries are subject to certain restrictions on dividends, loans and advances. The plans of reorganization of the MMJ Companies prohibit the MMJ Companies from paying dividends, including any cash dividends, to us and require that excess earnings be used in their businesses or to fund the MMJ Companies' installment payments. These prohibitions also effectively prevent the subsidiaries of the MMJ Companies from paying cash dividends to us as any such dividends would have to be first paid to the MMJ 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 MMJ 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 MMJ Companies may be considered outside of the ordinary course of business and subject to approval of the legal trustee and Japan Court. As a result, the assets of the MMJ Group, while available to satisfy the MMJ Companies' installment payments and the other obligations, capital expenditures and other operating needs of the MMJ Group, are not available for use by us in our other operations. Moreover, certain uses of the assets of the MMJ Group, including investments in certain capital expenditures and in MMT, may require consent of MMJ's trustees and/or the Japan Court. IMFT: Cash and equivalents and short-term investments in the table above included $84 million held by IMFT as of August 28, 2014. Our ability to access funds held by IMFT to finance our other operations is subject to agreement by Intel and contractual limitations. Amounts held by IMFT are not anticipated to be available to finance our other operations. Indefinitely Reinvested: As of August 28, 2014, we had $2.70 billion of cash and equivalents and short-term investments that were 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. Determination of the amount of unrecognized deferred tax liabilities related to investments in these foreign subsidiaries is not practicable. Operating Activities Net cash provided by operating activities was $5.70 billion for 2014, due primarily to a strong market for our products and our continued focus on cost-efficient operations. Operating cash flows in 2014 also benefitted by a $671 million increase in accounts payable and accrued expenses offset by a $518 million increase in receivables. 39 --------------------------------------------------------------------------------Investing Activities Net cash used for investing activities was $2.45 billion for 2014, which consisted primarily of cash expenditures of $2.66 billion for property plant and equipment and $506 million for the acquisition of available-for-sale securities (net of proceeds from sales and maturities of $557 million) offset by the use of $534 million of restricted cash in connection with the first MMJ creditor installment payment. 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 2015 will be approximately $3.6 billion to $4.0 billion. The actual amounts for 2015 will vary depending on market conditions. As of August 28, 2014, we had commitments of approximately $1.18 billion for the acquisition of property, plant and equipment, substantially all of which is expected to be paid within one year. Financing Activities Net cash used by financing activities was $1.95 billion for 2014, which included $3.84 billion for repayments of debt (including $1.20 billion for the amount in excess of principal of our convertible notes), $479 million of payments on equipment purchase contracts and $92 million of net cash received from noncontrolling interests offset by $2.21 billion of proceeds from issuance of debt and by $265 million of proceeds from issuance of common stock under our equity plans. 2014 Debt Restructure Throughout 2014, we reduced the dilutive effects of our convertible notes by exchanging, converting or repurchasing a portion of these notes using cash generated from operations and proceeds from issuing non-convertible debt with near investment-grade covenants. Approximately 90% of our Free Cash Flow (cash flows from operating activities less expenditures for property, plant and equipment less payments on equipment purchase contracts) generated during 2014 was used for these dilution-management activities. As a result, we eliminated convertible notes that would have been converted into 118 million shares of our common stock. In 2014, we initiated a series of actions to restructure our debt, including exchanges, conversions and settlements, repurchases, issuances and early repayments. The following table presents the net effect of each of the actions: Increase (Decrease) Increase (Decrease) in Increase (Decrease) (Decrease) in in Principal Carrying Value in Cash Equity Loss(1) Exchanges $ 585 $ 282 $ - $ (238 ) $ 49 Conversions and settlements(2) (770 ) (437 ) (1,446 ) (886 ) 130 Repurchases (320 ) (269 ) (857 ) (567 ) 23 Issuances 2,212 2,212 2,157 - - Early repayments (336 ) (334 ) (339 ) - 3 $ 1,371 $ 1,454 $ (485 ) $ (1,691 ) $ 205 (1) The loss on 2014 debt restructure activities was recorded as $184 million in other non-operating expense and $21 million in interest expense in 2014. (2) The change in carrying value includes an increase of $275 million for the reclassification of the fair value of the equity component to debt in connection with our election to settle the conversions of the 2031B Notes in cash. • Exchanges: Exchanged $440 million in aggregate principal amount of our 2027 Notes, 2031A Notes and 2031B Notes into $1.03 billion principal amount at maturity of 2043G Notes. • Conversions and Settlement: Holders of substantially all of our remaining 2014 Notes, 2027 Notes and 2031A Notes (with an aggregate principal amount of $770 million) converted their notes and we settled the conversions in cash for $1.45 billion. 40--------------------------------------------------------------------------------• Repurchases: Repurchased $320 million in aggregate principal amount of our 2031B Notes, 2032C Notes and 2032D Notes in privately-negotiated transactions for an aggregate of $857 million in cash. • Issuances: Issued $600 million in principal amount of 5.875% senior notes due February 2022 and $1.15 billion in principal amount of 5.500% senior notes due February 2025. Issued $462 million in principal amount of 1.258% senior notes due 2019 Notes, payable in 10 semi-annual installments commencing in July 2014. • Early Repayments: Repaid $334 million of notes and capital leases prior to their scheduled maturities. Subsequent to 2014, we settled an aggregate principal amount of $114 million of our remaining 2031B Notes for $389 million and repaid a $120 million note prior to its scheduled maturity. Available Credit Facilities: As of August 28, 2014, we had credit facilities available that provide for up to $408 million of additional financing, subject to outstanding balances of trade receivables and other conditions. (See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt" note.) Potential Settlement Obligations of Convertible Notes Since the closing price of our common stock for at least 20 trading days in the 30 trading day periods ended on June 30, 2014 and September 30, 2014 exceeded 130% of the initial conversion price per share of our 2032 Notes and 2033 Notes, holders of those notes have the right to convert their notes at any time through December 31, 2014. For our convertible notes, we have: (1) the requirement to pay cash for the principal amount and the option to pay either cash, shares of our common stock or any combination thereof for any remaining conversion obligation, or (2) the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion. The following table summarizes the potential settlements, as of August 28, 2014, that we could be required to make if all holders converted their 2032 Notes and 2033 Notes: Settlement If Settled With Minimum Cash If Settled Entirely Option for Required(1) With Cash(2) Initial Conversion Principal Outstanding Remainder Price Per Share Amount Principal Cash in Shares Cash Cash and/or 2032C Notes $ 9.63 shares $ 362 $ - 38 $ 1,235 Cash and/or 2032D Notes 9.98 shares 344 - 34 1,129 2033E Notes 10.93 Cash 300 300 18 900 2033F Notes 10.93 Cash 300 300 18 900 $ 1,306 $ 600 108 $ 4,164 (1) We are required to settle the principal amount of the 2033 Notes in cash. The remaining conversion obligation paid in shares is based on our closing share price of $32.81 as of August 28, 2014. (2) Based on our closing share price of $32.81 as of August 28, 2014. Assumes we elect cash settlement for the entire obligation. 41-------------------------------------------------------------------------------- Contractual Obligations Payments Due by Period Less than 1 More than 5 As of August 28, 2014 Total year 1-3 years 3-5 years years Notes payable(1)(2) $ 7,959 $ 976 $ 1,001 $ 1,601 $ 4,381 Capital lease obligations(2) 998 356 404 115 123 Operating leases(3) 116 22 32 25 37 Purchase obligations 1,869 1,724 117 12 16 Other long-term liabilities(4)(5) 1,060 335 411 206 108 Total $ 12,002 $ 3,413 $ 1,965 $ 1,959 $ 4,665 (1) Amounts include MMJ Creditor Installment Payments, convertible notes and other notes. Any future redemption or conversion of convertible debt could impact the amount and timing of our cash payments. (2) Amounts reflect principal and interest. (3) Amounts do not include contingent lease payments. (4) Amounts represent future cash payments to satisfy other long-term liabilities recorded on our consolidated balance sheet, including $335 million for the current portion of these long-term liabilities. (5) We are unable to reliably estimate the timing of future payments related to uncertain tax positions and noncurrent deferred tax liabilities; therefore, $255 million in aggregate of long-term income taxes payable and noncurrent deferred tax liabilities has been excluded from the preceding table. However, other noncurrent liabilities recorded on our consolidated balance sheet included these uncertain tax positions and noncurrent deferred tax liabilities. The obligations disclosed above do not include current liabilities, except for the current portion of long-term debt. The expected timing of payment amounts of the obligations discussed above is estimated based on current information. Timing and actual amounts paid may differ depending on the timing of receipt of goods or services, market prices, changes to agreed-upon amounts or timing of certain events for some obligations. Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancellable, (2) we would incur a penalty if the agreement was canceled, or (3) we must make specified minimum payments even if we do not take delivery of the contracted products or services ("take-or-pay"). If the obligation to purchase goods or services is noncancellable, the entire value of the contract was included in the above table. If the obligation is cancellable, but we would incur a penalty if canceled, the dollar amount of the penalty was included as a purchase obligation. Contracted minimum amounts specified in take-or-pay contracts are also included in the above table as they represent the portion of each contract that is a firm commitment. Under the Inotera Supply Agreement, effective on January 1, 2013, we are obligated to purchase for a three-year term (currently through December 2016) substantially all of Inotera's output at a purchase price based on a discount from market prices for our comparable components. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive one-year extensions, and if the parties do not agree to an extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down period. In the event of a wind-down, our share of Inotera's capacity would decline over the three year wind-down period. We purchased $2.68 billion of DRAM products from Inotera in 2014 under the Inotera Supply Agreement. The Inotera Supply Agreement does not contain a fixed or minimum purchase quantity as quantities are based on qualified production output and pricing fluctuates as it is based on market prices. Therefore, we did not include our obligations under the Inotera Supply Agreement in the contractual obligations table above. 42--------------------------------------------------------------------------------Off-Balance Sheet Arrangements We have entered into capped calls, which are intended to reduce the effect of potential dilution from our convertible notes. The capped calls provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our stock is above a specified initial strike price at the expiration dates. The amounts receivable varies based on the trading price of our stock, up to specified cap prices. The dollar value of the cash or shares that we would receive from the capped calls on their expiration dates ranges from $0 if the trading price of our stock is below the initial strike price for all of the capped calls to $864 million if the trading price of our stock is at or above the cap price for all of the capped calls. To purchase the capped calls, we paid $57 million in 2011, $103 million in 2012 and $48 million in 2013, respectively. The amounts paid were recorded as charges to additional capital. For further details of our capped call arrangements, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Equity - Micron Shareholders' Equity - Capped Calls" note. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments. Business Acquisitions: Accounting for acquisitions requires us to estimate the fair value of consideration paid and the individual assets and liabilities acquired, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized. Accounting for acquisitions can also involve significant judgment to determine when control of the acquired entity is transferred. We typically obtain independent third party valuation studies to assist in determining fair values, including assistance in determining future cash flows, appropriate discount rates and comparable market values. The items involving the most significant assumptions, estimates and judgments included determining the fair value of the following: • Property, plant and equipment, including determination of values in a continued-use model; • Deferred tax assets, including projections of future taxable income and tax rates; • Inventory, including estimated future selling prices, timing of product sales and completion costs for work in process; and • Debt, including discount rate and timing of payments. Consolidations: We have interests in joint venture entities that are VIEs. Determining whether to consolidate a VIE requires judgment in assessing (1) whether an entity is a VIE and (2) if we are the entity's primary beneficiary. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (a) the power to direct the activities that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding and financing and other applicable agreements and circumstances. Our assessment of whether we are the primary beneficiary of our VIEs requires significant assumptions and judgment. Contingencies: We are subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We accrue a liability and charge operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date. In accounting for the resolution of contingencies, considerable judgment is necessary to estimate amounts pertaining to periods prior to the resolution, which are charged to operations in the period of resolution, and amounts related to future periods. 43 -------------------------------------------------------------------------------- Income Taxes: We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. These estimates involve judgment and interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of our performance and other relevant factors. Realization of deferred tax assets is dependent on our ability to generate future taxable income. In recent periods, our results of operations have benefitted from increases in the amount of deferred taxes we expect to realize, primarily from the levels of capital spending and increases in the amount of taxable income we expect to realize in Japan and Taiwan. Our income tax provision or benefit is dependent, in part, on our ability to forecast future taxable income in these and other jurisdictions. Such forecasts are inherently difficult and involve numerous judgments including, among others, projecting future average selling prices and sales volumes, manufacturing and overhead costs, levels of capital spending and other factors that significantly impact our analyses of the amount of net deferred tax assets that are more likely than not to be realized. Inventories: Inventories are stated at the lower of average cost or market value. Cost includes labor, material and overhead costs, including product and process technology costs. Determining market value of inventories involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. To project average selling prices and sales volumes, we review recent sales volumes, existing customer orders, current contract prices, industry analyses of supply and demand, seasonal factors, general economic trends and other information. When these analyses reflect estimated market values below our manufacturing costs, we record a charge to cost of goods sold in advance of when the inventory is actually sold. Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded. For example, a 5% variance in the estimated selling prices would have changed the estimated market value of our memory inventory by approximately $254 million as of August 28, 2014. Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and, as a result, the timing of when product costs are charged to operations can vary significantly. U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values. The amount of any inventory write-down can vary significantly depending on the determination of inventory categories. Inventories are primarily categorized as memory (including DRAM, NAND Flash and NOR Flash) for purposes of determining lower of average cost or market. The major characteristics we consider in determining inventory categories are product type and markets. Property, Plant and Equipment: We review the carrying value of property, plant and equipment for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions which require judgment by us, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future selling prices for our products and future production and sales volumes. In addition, judgment is required in determining the groups of assets for which impairment tests are separately performed. Research and Development: Costs related to the conceptual formulation and design of products and processes are expensed as R&D as incurred. Determining when product development is complete requires judgment by us. We deem development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability. Subsequent to product qualification, product costs are valued in inventory. Stock-based Compensation: Stock-based compensation is estimated at the grant date based on the fair value of the award and is recognized as expense using the straight-line amortization method over the requisite service period. For performance-based stock awards, the expense recognized is dependent on the probability of the performance measure being achieved. We utilize forecasts of future performance to assess these probabilities and this assessment requires considerable judgment. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop these estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can result in a relatively large change in the estimated valuation. We use the Black-Scholes option valuation model to value employee stock awards. We estimate stock price volatility based on an average of its historical volatility and the implied volatility derived from traded options on our stock. 44 --------------------------------------------------------------------------------Recently Issued Accounting Standards See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Recently Issued Accounting Standards" note. |