XMEX:MU Micron Technology, Inc. Quarterly Report 10-Q Filing - 5/31/2012

Effective Date 5/31/2012

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

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2012

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                      to

Commission file number 1-10658

Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
75-1618004
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
 
 
8000 S. Federal Way, Boise, Idaho
83716-9632
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
(208) 368-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of outstanding shares of the registrant's common stock as of July 3, 2012, was 1,017,533,224.
 
 
 
 
 




PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

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

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Net sales
 
$
2,172

 
$
2,139

 
$
6,271

 
$
6,648

Cost of goods sold
 
1,938

 
1,661

 
5,522

 
5,211

Gross margin
 
234

 
478

 
749

 
1,437

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
156

 
151

 
481

 
437

Research and development
 
231

 
211

 
683

 
582

Other operating (income) expense, net
 
38

 
(121
)
 
63

 
(388
)
Operating income (loss)
 
(191
)
 
237

 
(478
)
 
806

 
 
 
 
 
 
 
 
 
Interest income
 
3

 
6

 
7

 
21

Interest expense
 
(56
)
 
(28
)
 
(126
)
 
(94
)
Other non-operating income (expense), net
 
1

 
10

 
39

 
(104
)
 
 
(243
)
 
225

 
(558
)
 
629

 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
38

 
(104
)
 
31

 
(187
)
Equity in net loss of equity method investees
 
(115
)
 
(44
)
 
(262
)
 
(118
)
Net income (loss)
 
(320
)
 
77

 
(789
)
 
324

 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 

 
(2
)
 

 
(22
)
Net income (loss) attributable to Micron
 
$
(320
)
 
$
75

 
$
(789
)
 
$
302

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 
 
 
Basic
 
$
(0.32
)
 
$
0.07

 
$
(0.80
)
 
$
0.31

Diluted
 
(0.32
)
 
0.07

 
(0.80
)
 
0.30

 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
987.3

 
998.9

 
983.9

 
986.6

Diluted
 
987.3

 
1,041.7

 
983.9

 
1,036.9









See accompanying notes to consolidated financial statements.
MICRON TECHNOLOGY, INC.

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

As of
 
May 31,
2012
 
September 1,
2011
Assets
 
 
 
 
Cash and equivalents
 
$
2,191

 
$
2,160

Short-term investments
 
134

 

Receivables
 
1,333

 
1,497

Inventories
 
1,894

 
2,080

Other current assets
 
78

 
95

Total current assets
 
5,630

 
5,832

Intangible assets, net
 
386

 
414

Property, plant and equipment, net
 
7,158

 
7,555

Equity method investments
 
403

 
483

Long-term marketable investments
 
361

 
52

Other noncurrent assets
 
378

 
416

Total assets
 
$
14,316

 
$
14,752

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
1,547

 
$
1,830

Deferred income
 
247

 
443

Equipment purchase contracts
 
121

 
67

Current portion of long-term debt
 
262

 
140

Total current liabilities
 
2,177

 
2,480

Long-term debt
 
2,936

 
1,861

Other noncurrent liabilities
 
717

 
559

Total liabilities
 
5,830

 
4,900

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 994.6 shares issued and outstanding (984.3 as of September 1, 2011)
 
99

 
98

Additional capital
 
8,791

 
8,610

Accumulated deficit
 
(1,159
)
 
(370
)
Accumulated other comprehensive income
 
80

 
132

Total Micron shareholders' equity
 
7,811

 
8,470

Noncontrolling interests in subsidiaries
 
675

 
1,382

Total equity
 
8,486

 
9,852

Total liabilities and equity
 
$
14,316

 
$
14,752








See accompanying notes to consolidated financial statements.
MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine months ended
 
May 31,
2012
 
June 2,
2011
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
(789
)
 
$
324

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

 
 

Depreciation expense and amortization of intangible assets
 
1,658

 
1,550

Amortization of debt discount and other costs
 
55

 
42

Equity in net loss of equity method investees
 
262

 
118

Stock-based compensation
 
71

 
57

Loss on extinguishment of debt
 

 
113

Gain from disposition of Japan Fab
 

 
(54
)
Change in operating assets and liabilities:
 
 

 
 

Receivables
 
134

 
110

Inventories
 
182

 
(345
)
Accounts payable and accrued expenses
 
(101
)
 
40

Customer prepayments
 
296

 
(1
)
Deferred income
 
(61
)
 
115

Deferred income taxes, net
 
(8
)
 
101

Other
 
(35
)
 
(40
)
Net cash provided by operating activities
 
1,664

 
2,130

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant and equipment
 
(1,367
)
 
(1,682
)
Purchases of available-for-sale securities
 
(499
)
 
(9
)
Additions to equity method investments
 
(180
)
 
(22
)
(Increase) decrease in restricted cash
 
(1
)
 
324

Proceeds from sales and maturities of available-for-sale securities
 
63

 
1

Proceeds from sales of property, plant and equipment
 
51

 
124

Return of equity method investment
 
1

 
48

Other
 
(48
)
 
3

Net cash used for investing activities
 
(1,980
)
 
(1,213
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of debt
 
1,065

 

Proceeds from equipment sale-leaseback transactions
 
403

 
268

Cash received from noncontrolling interests
 
151

 
8

Acquisition of noncontrolling interests
 
(466
)
 
(159
)
Distributions to noncontrolling interests
 
(387
)
 
(159
)
Repayments of debt
 
(152
)
 
(1,139
)
Payments on equipment purchase contracts
 
(132
)
 
(262
)
Cash (paid) received for capped call transactions
 
(102
)
 

Other
 
(33
)
 
8

Net cash provided by (used for) financing activities
 
347

 
(1,435
)
 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
31

 
(518
)
Cash and equivalents at beginning of period
 
2,160

 
2,913

Cash and equivalents at end of period
 
$
2,191

 
$
2,395

 
 
 
 
 
Supplemental disclosures
 
 

 
 

Income taxes refunded (paid), net
 
$
15

 
$
(79
)
Interest paid, net of amounts capitalized
 
(39
)
 
(54
)
Noncash investing and financing activities:
 
 

 
 

Equipment acquisitions on contracts payable and capital leases
 
643

 
422

Conversion of notes to stock, net of unamortized issuance cost
 
23

 

Exchange of convertible notes
 

 
175

See accompanying notes to consolidated financial statements.

1



MICRON TECHNOLOGY, INC.

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

Business and Basis of Presentation

Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise) is a global manufacturer and marketer of semiconductor devices, principally 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. In addition, we manufacture CMOS image sensors and other semiconductor products. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended September 1, 2011. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our consolidated financial position and our consolidated results of operations and cash flows. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our third quarters of fiscal 2012 and 2011 ended on May 31, 2012 and June 2, 2011, respectively. Our fiscal 2011 ended on September 1, 2011. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 1, 2011.


Variable Interest Entities

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

Unconsolidated Variable Interest Entities

Inotera – Inotera Memories, Inc. ("Inotera") is a VIE because of the terms of its supply agreement with us and our partner, Nanya Technology Corporation ("Nanya"). We have determined that we do not have power to direct the activities of Inotera that most significantly impact its economic performance, primarily due to (1) limitations on our governance rights that require the consent of other parties for key operating decisions and (2) our dependence on our joint venture partner for financing and the ability to operate in Taiwan. Therefore, we account for our interest in Inotera under the equity method.

Transform – Transform Solar Pty Ltd. ("Transform") is a VIE because its equity is not sufficient to permit it to finance its activities without additional financial support from us or our partner, Origin Energy Limited ("Origin"). We have determined that we do not have power to direct the activities of Transform that most significantly impact its economic performance, primarily due to limitations on our governance rights that require the consent of Origin for key operating decisions. Therefore, we account for our interest in Transform under the equity method. On May 25, 2012, the Board of Directors of Transform approved a liquidation plan and as a result, we recognized a charge of $69 million, which reduced our investment balance in Transform to zero.

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

For further information regarding our VIEs that we account for under the equity method, see "Equity Method Investments" note.

Consolidated Variable Interest Entities

IMFT – IM Flash Technologies, LLC ("IMFT") is a VIE because all of its costs are passed to us and our partner, Intel Corporation ("Intel"), through product purchase agreements and IMFT is dependent upon us or Intel for any additional cash requirements.  We determined that we have the power to direct the activities of IMFT that most significantly impact its economic performance.  The primary activities of IMFT are driven by the constant introduction of product and process technology.  Because we perform a significant majority of the technology development, we have the power to direct its key activities.  In addition, IMFT manufactures certain products exclusively for us using our technology.  We also determined that we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it.  Therefore, we consolidate IMFT. In the third quarter of 2012, we entered into agreements with Intel relating to IMFT. For further information regarding the effect of these agreements, see "Consolidated Variable Interest Entities – IM Flash" note.

IMFS – Prior to April 6, 2012, IM Flash Singapore, LLP ("IMFS") was a VIE because all of its costs were passed to us and our partner, Intel, through product purchase agreements and IMFS was dependent upon us or Intel for any additional cash requirements.  Prior to April 6, 2012, we determined that we had the power to direct the activities of IMFS that most significantly impacted its economic performance.  Additionally, since 2010, we had significantly greater economic exposure than Intel as a result of our significantly higher ownership interest in IMFS.  Therefore, we consolidated IMFS. On April 6, 2012, we acquired Intel's remaining interests in IMFS and it ceased to be a VIE. For further information regarding our acquisition of Intel's interests in IMFS, see "Consolidated Variable Interest Entities – IM Flash" note.

MP Mask – MP Mask Technology Center, LLC ("MP Mask") is a VIE because all of its costs are passed to us and our partner, Photronics, Inc. ("Photronics"), through product purchase agreements and it is dependent upon us or Photronics for any additional cash requirements.  We determined that we have the power to direct the activities of MP Mask that most significantly impact its economic performance, primarily because (1) of our tie-breaking voting rights over key operating decisions and (2) nearly all key MP Mask activities are driven by our supply needs.  We also determined that we have the obligation to absorb losses and the right to receive benefits from MP Mask that could potentially be significant to MP Mask.  Therefore, we consolidate MP Mask.

For further information regarding our consolidated VIEs, see "Consolidated Variable Interest Entities" note.


Recently Adopted Accounting Standards

In May 2011, the Financial Accounting Standards Board ("FASB") issued a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. We adopted this standard in the third quarter of 2012. The adoption of this standard did not have a material impact on our financial statements.



Recently Issued Accounting Standards

In June 2011, the FASB issued a new accounting standard on the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We are required to adopt this standard as of the beginning of 2013. The new standard also required presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented, which was indefinitely deferred by an update issued by the FASB in December 2011. The adoption of this standard will only impact the presentation of our financial statements.


Investments

Available-for-sale investments as of May 31, 2012 and September 1, 2011 were as follows:

 
 
May 31, 2012
 
September 1, 2011
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
2,023

 
$

 
$

 
$
2,023

 
$
1,462

 
$

 
$

 
$
1,462

Corporate bonds
 
231

 

 

 
231

 

 

 

 

Government bonds
 
154

 

 

 
154

 

 

 

 

Asset-backed securities
 
83

 

 

 
83

 

 

 

 

Commercial paper
 
25

 

 

 
25

 

 

 

 

Marketable equity securities
 
22

 

 
(6
)
 
16

 
27

 
32

 
(7
)
 
52

Certificates of deposit
 
18

 

 

 
18

 
155

 

 

 
155

 
 
$
2,556

 
$

 
$
(6
)
 
$
2,550

 
$
1,644

 
$
32

 
$
(7
)
 
$
1,669


As of May 31, 2012, no available-for-sale security had been in a loss position for longer than 12 months. Certain marketable equity securities, which have been in a loss position for less than 12 months, were determined not to be other-than-temporarily impaired due to the amount and duration that fair value was below cost, recent recovery in fair value and volatility of the security's fair value.

The table below presents the amortized cost and fair value of available-for-sale debt securities as of May 31, 2012 by contractual maturity.

 
 
Amortized Cost
 
Fair Value
Money market funds not due at a single maturity date
 
$
2,023

 
$
2,023

Due in 1 year or less
 
166

 
166

Due in 1 - 2 years
 
150

 
150

Due in 2 - 4 years
 
189

 
189

Due after 4 years
 
6

 
6

 
 
$
2,534

 
$
2,534


The amount of net unrealized holding gains (losses) reclassified out of accumulated other comprehensive income was $34 million in the second quarter of 2012 and was de minimis for all other periods. Proceeds from the sales of available-for-sale securities in the third quarter and first nine months of 2012 were $18 million and $59 million, respectively. Gross realized gains from sales of available-for-sale securities were $34 million for the second quarter of 2012. Gross realized gains and losses for all other periods presented were de minimis. The carrying value of investment securities sold was determined using the specific identification method.


2




Receivables

As of
 
May 31,
2012
 
September 1,
2011
Trade receivables (net of allowance for doubtful accounts of $6 and $3, respectively)
 
$
973

 
$
1,105

Income and other taxes
 
94

 
137

Related party receivables
 
82

 
72

Other
 
184

 
183

 
 
$
1,333

 
$
1,497


As of May 31, 2012 and September 1, 2011, related party receivables included $79 million and $67 million, respectively, due from Aptina Imaging Corporation ("Aptina") primarily for sales of image sensor products under a wafer supply agreement.  (See "Equity Method Investments" note.)

As of May 31, 2012 and September 1, 2011, other receivables included $50 million and $34 million, respectively, due from Intel for amounts related to NAND Flash product design and process development activities under cost-sharing agreements.  As of May 31, 2012 and September 1, 2011, other receivables also included $29 million and $25 million, respectively, due from Nanya for amounts related to DRAM product design and process development activities under a cost-sharing agreement. (See "Consolidated Variable Interest Entities" note and "Equity Method Investments" note.)


Inventories

As of
 
May 31,
2012
 
September 1,
2011
Finished goods
 
$
560

 
$
596

Work in process
 
1,164

 
1,342

Raw materials and supplies
 
170

 
142

 
 
$
1,894

 
$
2,080



Intangible Assets

As of
 
May 31, 2012
 
September 1, 2011
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
586

 
$
(234
)
 
$
571

 
$
(203
)
Customer relationships
 
127

 
(94
)
 
127

 
(82
)
Other
 
1

 

 
1

 

 
 
$
714

 
$
(328
)
 
$
699

 
$
(285
)

During the first nine months of 2012 and 2011, we capitalized $39 million and $157 million, respectively, for product and process technology with weighted-average useful lives of 9 years and 7 years, respectively.

Amortization expense for intangible assets was $23 million and $67 million for the third quarter and first nine months of 2012, respectively, and $19 million and $56 million for the third quarter and first nine months of 2011, respectively.  Annual amortization expense is estimated to be $89 million for 2012, $84 million for 2013, $76 million for 2014, $58 million for 2015 and $49 million for 2016.



Property, Plant and Equipment

As of
 
May 31,
2012
 
September 1,
2011
Land
 
$
92

 
$
92

Buildings
 
4,636

 
4,481

Equipment
 
15,379

 
14,735

Construction in progress
 
118

 
155

Software
 
319

 
293

 
 
20,544

 
19,756

Accumulated depreciation
 
(13,386
)
 
(12,201
)
 
 
$
7,158

 
$
7,555


Depreciation expense was $502 million and $1,591 million for the third quarter and first nine months of 2012, respectively, and $528 million and $1,494 million for the third quarter and first nine months of 2011, respectively.

Other noncurrent assets included buildings, equipment, and other assets classified as held for sale of $32 million as of May 31, 2012 and $35 million as of September 1, 2011.


Equity Method Investments

As of
 
May 31, 2012
 
September 1, 2011
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$
403

 
39.7
%
 
$
388

 
29.7
%
Transform
 

 
50.0
%
 
87

 
50.0
%
Other
 

 
Various

 
8

 
Various

 
 
$
403

 
 

 
$
483

 
 


We recognize our share of earnings or losses from these entities under the equity method on a two-month lag.  Equity in net loss of equity method investees, net of tax, included the following:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Inotera:
 
 
 
 
 
 
 
 
Equity method loss
 
$
(48
)
 
$
(42
)
 
$
(184
)
 
$
(113
)
Inotera Amortization
 
12

 
12

 
36

 
36

Other
 
(2
)
 
(2
)
 
(9
)
 
(4
)
 
 
(38
)
 
(32
)
 
(157
)
 
(81
)
Transform
 
(77
)
 
(8
)
 
(99
)
 
(24
)
Other
 

 
(4
)
 
(6
)
 
(13
)
 
 
$
(115
)
 
$
(44
)
 
$
(262
)
 
$
(118
)

Our maximum exposure to loss from our involvement with our equity method investments that were VIEs was $350 million and primarily included our Inotera investment balance as well as related translation adjustments in accumulated other comprehensive income and receivables, if any.  We may also incur losses in connection with our rights and obligations to purchase a portion of Inotera's wafer production capacity under a supply agreement with Inotera. As a result of our March 2012 equity contribution to Inotera, our obligation to purchase Inotera's capacity may increase when additional output results from Inotera's capital investments enabled by our equity investment.

Inotera

We have partnered with Nanya in Inotera, a Taiwanese DRAM memory company, since the first quarter of 2009.  As of May 31, 2012, we held a 39.7% ownership interest in Inotera, Nanya held a 26.1% ownership interest and the remaining ownership interest was publicly held.

In the second quarter of 2012, we loaned $133 million to Inotera under a 90-day note with a stated annual interest rate of 2% to facilitate the purchase of capital equipment necessary to implement new process technology. The loan was repaid to us with accrued interest in March 2012. Also, in March 2012, we contributed $170 million to Inotera, which increased our ownership percentage from 29.7% to 39.7%.

The net carrying value of our initial and subsequent investments was less than our proportionate share of Inotera's equity at the time of those investments.  These differences are being amortized as a net credit to earnings through equity in net income (loss) of equity method investees (the "Inotera Amortization").  As of May 31, 2012, $32 million of Inotera Amortization remained to be recognized, of which $12 million is scheduled to be amortized in the remainder of 2012 with the remaining amount to be amortized through 2034.

Because of significant market declines in the selling prices of DRAM, Inotera incurred net losses of $155 million for its first quarter ended March 31, 2012. Also, Inotera's current liabilities exceeded its current assets by $2 billion as of March 31, 2012, which exposes Inotera to liquidity risk. Inotera's management has developed plans to improve its liquidity. There can be no assurance that Inotera's plans to improve its liquidity will be successful.

We have a supply agreement with Inotera, under which Nanya is also a party, for the rights and obligations to purchase 50% of Inotera's wafer production capacity (the "Inotera Supply Agreement"). As a result of our March 2012 $170 million equity contribution to Inotera, we expect to receive a higher share of Inotera's 30-nanometer output when it becomes available as a result of Inotera capital investments enabled by our investment. Our cost of wafers purchased under the Inotera Supply Agreement is based on a margin-sharing formula among Nanya, Inotera and us. Under such formula, all parties' manufacturing costs related to wafers supplied by Inotera, as well as our and Nanya's revenue for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers acquired from Inotera. Under the Inotera Supply Agreement, we purchased $178 million and $476 million of DRAM products in the third quarter and first nine months of 2012, respectively, and $177 million and $481 million of DRAM products in the third quarter and first nine months of 2011, respectively.

As of May 31, 2012 and September 1, 2011, there were gains of $54 million and $65 million, respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.  As of May 31, 2012, based on the closing trading price of Inotera's shares in an active market, the market value of our equity interest in Inotera was $554 million, which exceeded our net carrying value of $349 million. The net carrying value is our investment balance of $403 million less cumulative translation adjustments in accumulated other comprehensive income (loss).

Under a cost-sharing arrangement, we share DRAM development costs equally with Nanya. As a result, our research and development ("R&D") costs were reduced by $35 million and $108 million for the third quarter and first nine months of 2012, respectively, and $38 million and $101 million for the third quarter and first nine months of 2011, respectively.  In addition, for sales of DRAM products manufactured by or for Nanya on process nodes of 50nm or higher, we received royalty revenue from Nanya of $4 million and $8 million for the third quarter and first nine months of 2012, respectively, and $5 million and $18 million for the third quarter and first nine months of 2011, respectively.

Transform

In the second quarter of 2010, we acquired a 50% interest in Transform, a developer, manufacturer and marketer of photovoltaic technology and solar panels, from Origin.  As of May 31, 2012, we and Origin each held a 50% ownership interest in Transform.  During the third quarter and first nine months of 2012, we and Origin each contributed $3 million and $10 million, respectively, of cash to Transform, and during the third quarter and first nine months of 2011, we and Origin each contributed $11 million and $22 million, respectively, of cash to Transform.  For the third quarter and first nine months of 2012, we recognized net sales of $3 million and $11 million, respectively, for transition services provided to Transform. For the third quarter and first nine months of 2011, we recognized net sales of $5 million and $16 million, respectively, for transition services provided to Transform. Revenue on our sales to Transform approximated costs.

As a result of the ongoing challenging global environment in the solar industry and unfavorable worldwide supply and demand conditions, on May 25, 2012, the Board of Directors of Transform approved a liquidation plan. As a result of the liquidation plan, we recognized a charge of $69 million, which reduced our investment balance in Transform to zero.

Other

Included in other equity method investments is our 35% equity interest in Aptina. During the second quarter of 2012, the amount of cumulative loss we recognized from our investment in Aptina reduced our investment balance to zero and we ceased recognizing our proportionate share of Aptina's losses. We will resume recognizing our proportionate share of Aptina's earnings only when our proportionate share of its earnings exceeds the amount of cumulative net losses not recognized.

We manufacture components for CMOS image sensors for Aptina under a wafer supply agreement.  For the third quarter and first nine months of 2012, we recognized net sales of $99 million and $292 million, respectively, from products sold to Aptina. For the third quarter and first nine months of 2011, we recognized net sales of $104 million and $245 million, respectively, from products sold to Aptina. Revenue on our sales to Aptina approximated costs.

Also included in other equity method investments is our 50% investment in MeiYa Technology Corporation ("MeiYa"). In May 2012, we received $1 million as a return of our remaining MeiYa investment.


Accounts Payable and Accrued Expenses

As of
 
May 31,
2012
 
September 1,
2011
Accounts payable
 
$
779

 
$
1,187

Salaries, wages and benefits
 
272

 
304

Customer advances
 
151

 
7

Related party payables
 
128

 
141

Income and other taxes
 
29

 
30

Other
 
188

 
161

 
 
$
1,547

 
$
1,830


As of May 31, 2012 and September 1, 2011, related party payables included $128 million and $139 million, respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement.

As of May 31, 2012, customer advances included $150 million for amounts received from Intel to be applied to Intel's future purchases under a NAND Flash supply agreement. In addition, as of May 31, 2012, other noncurrent liabilities included $152 million from this agreement. (See "Consolidated Variable Interest Entities" and "IM Flash Agreements" notes.)

As of May 31, 2012 and September 1, 2011, other accounts payable and accrued expenses included $9 million and $17 million, respectively, due to Intel for NAND Flash product design and process development and licensing fees pursuant to cost-sharing agreements.



Debt

As of
 
May 31,
2012
 
September 1,
2011
2014 convertible senior notes, due June 2014 at stated rate of 1.875%, effective rate of 7.9%, net of discount of $101 and $134, respectively
 
$
848

 
$
815

Capital lease obligations, due in periodic installments through August 2050 at 5.1% and 6.1%, respectively
 
719

 
423

2032C convertible senior notes, due May 2032 at stated rate of 2.375%, effective rate of 6.0%, net of discount of $102
 
448

 

2032D convertible senior notes, due May 2032 at stated rate of 3.125%, effective rate of 6.3%, net of discount of $91
 
359

 

2031A convertible senior notes, due August 2031 at stated rate of 1.5%, effective rate of 6.5%, net of discount of $82 and $90, respectively
 
263

 
255

2031B convertible senior notes, due August 2031 at stated rate of 1.875%, effective rate of 7.0%, net of discount of $104 and $111, respectively
 
241

 
234

2027 convertible senior notes, due June 2027 at stated rate of 1.875%, effective rate of 6.9%, net of discount of $36 and $40, respectively
 
139

 
135

2013 convertible senior notes at stated rate of 4.25%
 
116

 
139

Intel senior note
 
65

 

 
 
3,198

 
2,001

Less current portion
 
(262
)
 
(140
)
 
 
$
2,936

 
$
1,861


Capital Lease Obligations

In the third quarter of 2012, we received $63 million in proceeds from equipment sales-leaseback transactions and as a result recorded capital lease obligations aggregating $63 million at a weighted-average effective interest rate of 4.1%, payable in periodic installments through May 2016. In the first nine months of 2012, we received $403 million in proceeds from equipment sales-leaseback transactions and as a result recorded capital lease obligations aggregating $403 million at a weighted-average effective interest rate of 4.1%, payable in periodic installments through May 2016.

2032C and 2032D Notes

On April 18, 2012, we issued $550 million of 2.375% Convertible Senior Notes due May 2032 (the "2032C Notes") and $450 million of 3.125% Convertible Senior Notes due May 2032 (the "2032D Notes" and together with the 2032C Notes, the "2032 Notes"). Issuance costs for the 2032 Notes totaled $21 million. The initial conversion rate for the 2032C Notes is 103.8907 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $9.63 per share of common stock. The initial conversion rate for the 2032D Notes is 100.1803 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $9.98 per share of common stock. Interest is payable in May and November of each year.

Upon issuance of the 2032 Notes, we recorded $805 million of debt, $191 million of additional capital and $17 million of deferred debt issuance costs (included in other noncurrent assets). The amount recorded as debt is based on the fair value of the debt component as a standalone instrument and was determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance (Level 2). The difference between the debt recorded at inception and the principal amount ($104 million for the 2032C Notes and $92 million for the 2032D Notes) is being accreted to principal as interest expense through May 2019 for the 2032C Notes and May 2021 for the 2032D Notes, the expected life of the notes.

Conversion Rights: Holders may convert their 2032 Notes under the following circumstances: (1) if the 2032 Notes are called for redemption; (2) during any calendar quarter if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price (approximately $12.52 per share for the 2032C Notes and $12.97 per share for the 2032D Notes) of the 2032C or 2032D Notes; (3) during the five business day period immediately after any five consecutive trading day period in which the trading price of the 2032C or 2032D Notes is less than 98% of the product of the closing price of our common stock and the conversion rate of the 2032C or 2032D Notes; (4) if specified distributions or corporate events occur, as set forth in the indenture for the 2032 Notes; or (5) at any time after February 1, 2032.

We have the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion. It is our current intent to settle the principal amount of the 2032 Notes in cash upon conversion. The 2032 Notes are considered in diluted earnings per share under the treasury stock method.

Cash Redemption at Our Option: We may redeem for cash the 2032C Notes on or after May 1, 2016 and the 2032D Notes on or after May 1, 2017 if the volume weighted average price of our common stock has been at least 130% of the conversion price (approximately $12.52 per share for the 2032C Notes and $12.97 per share for the 2032D Notes) for at least 20 trading days during any 30 consecutive trading day period. The redemption price will equal the principal amount plus accrued and unpaid interest. If we redeem the 2032C Notes prior to May 4, 2019, or the 2032D Notes prior to May 4, 2021, we will also make a "make-whole premium" payment in cash equal to the present value of all remaining scheduled payments of interest from the redemption date to May 4, 2019 for the 2032C Notes, or to May 4, 2021 for the 2032D Notes, using a discount rate equal to 150 basis points.

Cash Repurchase at the Option of the Holder: We may be required by the holders of the 2032 Notes to repurchase for cash all or a portion of the 2032C Notes on May 1, 2019 and all or a portion of the 2032D Notes on May 1, 2021. The repurchase price is equal to the principal amount plus accrued and unpaid interest. Upon a change in control or a termination of trading, as defined in the indenture, holders of the 2032 Notes may require us to repurchase for cash all or a portion of their 2032 Notes at a repurchase price equal to the principal amount plus accrued and unpaid interest.

2013 Notes Conversion

In the third quarter of 2012, we provided a written notice that we would redeem our 2013 convertible senior notes (the "2013 Notes") on June 4, 2012. Through May 31, 2012, $23 million of principal amount of the 2013 Notes had been converted by holders into 4.4 million shares. The remaining $116 million principal amount was converted by holders into 22.9 million shares in June 2012. We were required to pay a "make-whole premium" of $9 million, which is reflected in interest expense for the third quarter of fiscal 2012, to holders of the 2013 Notes who converted their 2013 Notes in connection with the call for redemption.

Intel Note

In connection with the IM Flash joint venture agreements, we borrowed $65 million under a two-year senior unsecured promissory note from Intel, payable in approximately equal quarterly installments with interest at a rate of Libor minus 50 basis points. The proceeds of the loan are to be used to fund purchases of equipment relating to the research and development or manufacturing of certain emerging memory technologies.

Debt Restructure

In the first quarter of 2011, in connection with a series of debt restructure transactions with certain holders of our convertible notes, we recognized a loss of $111 million as follows:

$15 million on the exchange of $175 million in aggregate principal amount of our 2014 convertible senior notes (the "2014 Notes") for $175 million in aggregate principal amount of new 2027 convertible senior notes;
$17 million (including transaction fees) on the repurchase of $176 million in aggregate principal amount of our 2014 Notes for $171 million in cash; and
$79 million (including transaction fees) on the repurchase of $91 million in aggregate principal amount of our 2013 convertible senior notes for $166 million in cash.



Contingencies

We have accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below. We are currently a party to other legal actions arising from the normal course of business, none of which is expected to have a material adverse effect on our business, results of operations or financial condition.

Patent Matters

As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe their intellectual property rights.

We are engaged in litigation with Rambus, Inc. ("Rambus") relating to certain of Rambus' patents and certain of our claims and defenses. Our lawsuits with Rambus are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy. On August 28, 2000, we filed a complaint against Rambus in the U.S. District Court for the District of Delaware seeking declaratory and injunctive relief. The complaint alleges, among other things, various anticompetitive activities and also seeks a declaratory judgment that certain Rambus patents are invalid and/or unenforceable. Rambus subsequently filed an answer and counterclaim in Delaware alleging, among other things, infringement of twelve Rambus patents and seeking monetary damages and injunctive relief. We subsequently added claims and defenses based on Rambus' alleged spoliation of evidence and litigation misconduct. The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007. On January 9, 2009, Judge Robinson entered an opinion in our favor holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against us. Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit. On May 13, 2011, the Federal Circuit affirmed Judge Robinson's finding of spoliation, but vacated the dismissal sanction and remanded the case to the Delaware District Court for analysis of the remedy based on the Federal Circuit's decision. On January 13, 2006, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that certain of our DDR2, DDR3, RLDRAM and RLDRAM II products infringe as many as fourteen Rambus patents and seeking monetary damages, treble damages, and injunctive relief. The Northern District of California Court stayed the trial of the patent phase of the Northern District of California case upon appeal of the Delaware spoliation issue to the Federal Circuit.

On March 6, 2009, Panavision Imaging, LLC filed suit against us and Aptina Imaging Corporation, then a wholly-owned subsidiary, in the U.S. District Court for the Central District of California. The complaint alleged that certain of our and Aptina's image sensor products infringed four Panavision Imaging U.S. patents and sought injunctive relief, damages, attorneys' fees, and costs. On February 7, 2011, the Court ruled that one of the four patents in suit was invalid for indefiniteness. On March 10, 2011, claims relating to the remaining three patents in suit were dismissed with prejudice. Panavision subsequently filed a motion for reconsideration of the Court's decision regarding invalidity of the first patent, and we filed a motion for summary judgment of non-infringement of such patent. On July 8, 2011, the Court issued an order that rescinded its prior indefiniteness decision, and held that the disputed term does not render the claims in suit indefinite. On February 3, 2012, the Court granted our motion for summary judgment of non-infringement. On March 20, 2012, we executed a settlement agreement with Panavision pursuant to which the parties agreed to a settlement and release of all claims and a dismissal with prejudice of the litigation, which did not have a material effect on our business, results of operations or financial condition.

On September 1, 2011, HSM Portfolio LLC and Technology Properties Limited LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and seventeen other defendants. The complaint alleges that certain of our DRAM and image sensor products infringe two U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On September 9, 2011, Advanced Data Access LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Tyler) against us and seven other defendants. On November 16, 2011, Advanced Data Access filed an amended complaint. The amended complaint alleges that certain of our DRAM products infringe two U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On September 14, 2011, Smart Memory Solutions LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and Winbond Electronics Corporation of America.  The complaint alleges that certain of our NOR Flash products infringe a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs.

On December 5, 2011, the Board of Trustees for the University of Illinois filed a patent infringement action against us in the U.S. District Court for the Central District of Illinois. The complaint alleges that unspecified semiconductor products of ours infringe three U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On March 26, 2012, Semiconductor Technologies, LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Marshall) against us. The complaint alleges that certain of our DRAM products infringe five U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs.

On March 28, 2012, Technology Partners Limited LLC (“TPL”) filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Tyler) against us. The complaint alleges that certain of our Lexar flash card readers infringe four U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs. On March 26, 2012, TPL filed a parallel complaint with the U.S. International Trade Commission under Section 337 of the Tariff Act of 1930 against us and numerous other companies alleging infringement of the same patents and seeking an exclusion order preventing the importation of certain flash card readers. The District Court action has been stayed pending the outcome of the ITC matter. The ITC matter is scheduled for trial on January 7, 2013.

On April 17, 2012, Anu IP, LLC (“Anu”) filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Marshall) against us. The complaint alleges that certain of our Lexar USB drives infringe one U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs. On April 18, 2012, Anu filed a parallel complaint with the U.S. International Trade Commission under Section 337 of the Tariff Act of 1930 against us and numerous other companies alleging infringement of the same patent and another related patent and seeking an exclusion order preventing the importation of certain USB drives. The District Court action has been stayed pending the outcome of the ITC matter.

On April 27, 2012, Semcon Tech, LLC filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that our use of a Reflexion CMP polishing system purchased from Applied Materials infringes a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs.

Among other things, the above lawsuits pertain to certain of our SDRAM, DDR, DDR2, DDR3, RLDRAM, NAND Flash, NOR Flash and image sensor products, which account for a significant portion of our net sales.

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

Antitrust Matters

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers which alleged that the defendants harmed Rambus by engaging in concerted and unlawful efforts affecting Rambus DRAM ("RDRAM") by eliminating competition and stifling innovation in the market for computer memory technology and computer memory chips.  Rambus' complaint alleged various causes of action under California state law including, among other things, a conspiracy to restrict output and fix prices, a conspiracy to monopolize, intentional interference with prospective economic advantage, and unfair competition. Rambus sought a judgment for damages of approximately $3.9 billion, joint and several liability, trebling of damages awarded, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys' fees and costs. Trial began on June 20, 2011, and the case went to the jury on September 21, 2011. On November 16, 2011, the jury found for us on all claims. On April 2, 2012, Rambus filed a notice of appeal to the California 1st District Court of Appeal.

At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging a conspiracy to increase DRAM prices in violation of federal and state antitrust laws and state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys' fees. A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings. In July, 2006, the Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California. The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law. On June 23, 2010, we executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States. Subject to certain conditions, including final court approval of the class settlements, we agreed to pay approximately $67 million in aggregate in three equal installments over a two-year period. As of May 31, 2012, we have paid $45 million into an escrow account in accordance with the settlement agreement.

Three putative class action lawsuits alleging price-fixing of DRAM products also have been filed against us in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, asserting violations of the Canadian Competition Act and other common law claims.  The claims were initiated between December 2004 (British Columbia) and June 2006 (Quebec). The plaintiffs seek monetary damages, restitution, costs, and attorneys' fees. The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States.  Plaintiffs' motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively.  Plaintiffs subsequently filed an appeal of each of those decisions.  On November 12, 2009, the British Columbia Court of Appeal reversed, and on November 16, 2011, the Quebec Court of Appeal also reversed the denial of class certification and remanded the cases for further proceedings.  

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice ("SDE") announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry. The SDE's Notice of Investigation names various DRAM manufacturers and certain executives, including us, and focuses on the period from July 1998 to June 2002.

On September 24, 2010, Oracle America Inc. ("Oracle"), successor to Sun Microsystems, a DRAM purchaser that opted-out of a direct purchaser class action suit that was settled, filed suit against us in U.S. District Court for the Northern District of California. The complaint alleged a conspiracy to increase DRAM prices and other violations of federal and state antitrust and unfair competition laws based on purported conduct for the period from August 1, 1998 through at least June 15, 2002. Oracle sought joint and several damages, trebled, as well as restitution, disgorgement, attorneys' fees, costs and injunctive relief. On March 23, 2012, we entered into a settlement agreement with Oracle pursuant to which we agreed to make a payment of $58 million to Oracle for a settlement and full release of all claims and a dismissal with prejudice of the litigation. The settlement amount was accrued and charged to operations in the second quarter of 2012.

We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss, except as noted in the U.S. indirect purchasers cases and Oracle above. The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Commercial Matters

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda AG ("Qimonda") insolvency proceedings, filed suit against us and Micron Semiconductor B.V., our Netherlands subsidiary, in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between us and Qimonda signed in fall 2008 pursuant to which we purchased all of Qimonda's shares of Inotera Memories, Inc. and seeks an order requiring us to retransfer the Inotera shares to the Qimonda estate. The complaint also seeks to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross license between us and Qimonda entered into at the same time as the share purchase agreement. A hearing scheduled to begin on November 9, 2011 was continued and now is scheduled for September 25, 2012. We are unable to predict the outcome of this lawsuit and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera shares or equivalent monetary damages and the termination of the patent cross license, which could have a material adverse effect on our business, results of operation or financial condition.

In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations or financial condition.


Micron Shareholders' Equity and Noncontrolling Interests in Subsidiaries

Changes in the components of equity were as follows:

 
 
Nine Months Ended May 31, 2012
 
Nine Months Ended June 2, 2011
 
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
Beginning balance
 
$
8,470

 
$
1,382

 
$
9,852

 
$
8,020

 
$
1,796

 
$
9,816

 
 


 


 
 
 


 


 
 
Net income (loss)
 
(789
)
 

 
(789
)
 
302

 
22

 
324

Other comprehensive income (loss)
 
(52
)
 
(5
)
 
(57
)
 
108

 
8

 
116

Comprehensive income (loss)
 
(841
)
 
(5
)
 
(846
)
 
410

 
30

 
440

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interests
 

 
(466
)
 
(466
)
 
67

 
(226
)
 
(159
)
Net contribution from (distributions to) noncontrolling interests
 

 
(236
)
 
(236
)
 

 
(151
)
 
(151
)
Capped call transactions
 
(102
)
 

 
(102
)
 

 

 

Issuance and repurchase of convertible notes
 
191

 

 
191

 
13

 

 
13

Conversion of 2013 notes
 
22

 

 
22

 

 

 

Other activities attributable to Micron
 
71

 

 
71

 
73

 

 
73

Ending balance
 
$
7,811

 
$
675

 
$
8,486

 
$
8,583

 
$
1,449

 
$
10,032


2012C and 2012D Capped Call Transactions

Concurrent with the offering of the 2032C and 2032D Notes, on April 12, 2012 and April 17, 2012, we entered into capped call transactions (the "2012C Capped Calls" and "2012D Capped Calls," collectively the "2012 Capped Calls") that have an initial strike price of approximately $9.80 and $10.16 per share, respectively, subject to certain adjustments, which was set to be slightly higher than the initial conversion prices of approximately $9.63 for the 2032C Notes and $9.98 for the 2032D Notes.  The 2012C Capped Calls are in four tranches, have cap prices of $14.26, $14.62, $15.33 and $15.69 per share, and cover, subject to anti-dilution adjustments similar to those contained in the 2032C Notes, an approximate combined total of 56.3 million shares of common stock.  The 2012C Capped Calls expire on various dates between May 2016 and November 2017. The 2012D Capped Calls are in four tranches, have cap prices of $14.62, $15.33, $15.69 and $16.04 per share, and cover, subject to anti-dilution adjustments similar to those contained in the 2032D Notes, an approximate combined total of 44.3 million shares of common stock.  The 2012D Capped Calls expire on various dates between November 2016 and May 2018.  The 2012 Capped Calls are intended to reduce the potential dilution upon conversion of the 2032 Notes.  The 2012 Capped Calls may be settled in shares or cash, at our election. Settlement of the 2012 Capped Calls in cash on their respective expiration dates would result in us receiving an amount ranging from zero, if the market price per share of our common stock is at or below $9.80, to a maximum of $551 million.  We paid $103 million to purchase the 2012 Capped Calls.  The 2012 Capped Calls are considered capital transactions and the related cost was recorded as a charge to additional capital.

2007 Capped Call Settlement

Concurrent with the offering of our 1.875% Convertible Senior Notes due 2014, we purchased capped calls with a strike price of approximately $14.23 per share and various expiration dates between November 2011 and December 2012 (the "2007 Capped Calls").  In the first six months of 2012, 2007 Capped Calls covering 30.4 million shares expired according to their terms.  In April 2012, we settled the remaining 2007 Capped Calls, covering 60.9 million shares, and received a de minimis payment.


Derivative Financial Instruments

We are exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the euro, shekel, Singapore dollar and yen.  We are also exposed to currency exchange rate risk for operations and capital expenditures, primarily denominated in the euro and yen.  We use derivative instruments to manage our exposures to changes in currency exchange rates.  For exposures associated with our monetary assets and liabilities, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on our earnings.  For exposures associated with our operations and capital expenditures, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows.

Our derivatives consist primarily of currency forward contracts and currency options structured as currency collars.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  Our maximum exposure to loss due to credit risk that we would incur if parties to forward contracts and options failed completely to perform according to the terms of the contracts was equal to our carrying value of the forward contracts and currency options as of May 31, 2012, as listed in the tables below under asset fair values.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, we monitor the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.  We have the following currency risk management programs:

Currency Derivatives without Hedge Accounting Designation

We utilize a rolling hedge strategy with currency forward contracts that generally mature within 35 days to hedge our exposure to changes in currency exchange rates.  At the end of each reporting period, monetary assets and liabilities held or denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Currency forward contracts are valued at fair values based on bid prices of dealers or exchange quotations (referred to as Level 2).  Realized and unrealized gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

 
 
Notional Amount(1) (in U.S. Dollars)
 
Fair Value of
Currency
 
 
Asset (2)
 
(Liability) (3)
As of May 31, 2012:
 
 
 
 
 
 
Singapore dollar
 
$
229

 
$

 
$
(4
)
Euro
 
207

 

 
(5
)
Yen
 
78

 
1

 

Shekel
 
59

 

 
(1
)
Other
 
21

 

 
(1
)
 
 
$
594

 
$
1

 
$
(11
)
 
 
 
 
 
 
 
As of September 1, 2011:
 
 

 
 

 
 

Singapore dollar
 
$
210

 
$

 
$

Euro
 
301

 
3

 

Yen
 
165

 
3

 

Shekel
 
98

 

 
(2
)
Other
 
50

 

 

 
 
$
824

 
$
6

 
$
(2
)
(1) 
Represents the face value of outstanding contracts.
(2) 
Included in other receivables.
(3) 
Included in other accounts payable and accrued expenses.

For currency forward contracts without hedge accounting designation, we recognized losses of $11 million and $28 million for the third quarter and first nine months of 2012, respectively, and gains of $12 million and $17 million for the third quarter and first nine months of 2011, respectively, which were included in other operating income (expense).

Currency Derivatives with Cash Flow Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months and currency options that generally mature from 12 to 18 months to hedge the exposure of changes in cash flows from changes in currency exchange rates for certain capital expenditures and forecasted operations.  Currency forward contracts are valued at their fair values based on market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread (referred to as Level 2).  Currency options are valued at their fair value using the Black-Scholes option valuation model using input of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (referred to as Level 2). For those derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives was included as a component of accumulated other comprehensive income (loss) in shareholders' equity.  The amounts in accumulated other comprehensive income (loss) for those cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operations and in the same periods in which the underlying transactions affect earnings.  The ineffective or excluded portion of the realized and unrealized gain or loss is included in other operating income (expense).  Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:

 
 
Notional Amount(1)  (in U.S. Dollars)
 
Fair Value of
Currency
 
 
Asset (2)
 
(Liability) (3)
As of May 31, 2012:
 
 
 
 
 
 
Forward contracts
 
 
 
 
 
 
Yen
 
$
80

 
$
1

 
$

Euro
 
12

 

 
(1
)
Options
 
 
 
 
 
 
Yen
 
24

 
1

 

 
 
$
116

 
$
2

 
$
(1
)
As of September 1, 2011:
 
 

 
 

 
 

Forward contracts
 
 
 
 
 
 
Yen
 
$
19

 
$
1

 
$

Euro
 
232

 
8

 

 
 
$
251

 
$
9

 
$

(1) 
Represents the face value of outstanding contracts
(2) 
Included in other receivables
(3) 
Included in other accounts payable and accrued expenses

For the first nine months of 2012, we recognized $11 million of net derivative losses in other comprehensive income from the effective portion of cash flow hedges. For the third quarter and first nine months of 2011, we recognized $19 million and $47 million, respectively, of net derivative gains in other comprehensive income from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other operating income (expense) were not significant in the third quarters and first nine months of 2012 and 2011.  Amounts in accumulated other comprehensive income for capital expenditures are amortized to manufacturing cost over the useful life of the underlying hedged equipment and reclassified to earnings when inventory is sold. Amounts in accumulated other comprehensive income for inventory purchase are reclassified to earnings when inventory is sold.  In the third quarter and first nine months of 2012, $2 million and $6 million, respectively, of net gains were reclassified from other comprehensive income (loss) to earnings and the amount of net derivative gains included in other accumulated comprehensive income (loss) expected to be reclassified into earnings in the next 12 months was $10 million as of May 31, 2012.


Fair Value Measurements

Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), observable inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).

Fair Value Measurements on a Recurring Basis

All marketable debt and equity investments are classified as available-for-sale and are carried at fair value. Assets measured at fair value on a recurring basis were as follows:

 
 
May 31, 2012
 
September 1, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
2,023

 
$

 
$

 
$
2,023

 
$
1,462

 
$

 
$

 
$
1,462

Commercial paper
 

 
18

 

 
18

 

 

 

 

Certificates of deposit
 

 
14

 

 
14

 

 
155

 

 
155

 
 
2,023

 
32

 

 
2,055

 
1,462

 
155

 

 
1,617

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government bonds
 

 
61

 

 
61

 

 

 

 

Corporate bonds
 

 
56

 

 
56

 

 

 

 

Commercial paper
 

 
7

 

 
7

 

 

 

 

Asset-backed securities
 

 
6

 

 
6

 

 

 

 

Certificates of deposit
 

 
4

 

 
4

 

 

 

 

 
 

 
134

 

 
134

 

 

 

 

Long-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
175

 

 
175

 

 

 

 

Government bonds
 

 
93

 

 
93

 

 

 

 

Asset-backed securities
 

 
77

 

 
77

 

 

 

 

Marketable equity securities
 
4

 
12

 

 
16

 
37

 
15

 

 
52

 
 
4

 
357

 

 
361

 
37

 
15

 

 
52

Noncurrent assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets held for sale
 

 

 
32

 
32

 

 

 
35

 
35

 
 

 

 
32

 
32

 

 

 
35

 
35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,027

 
$
523

 
$
32

 
$
2,582

 
$
1,499

 
$
170

 
$
35

 
$
1,704


Government bonds consist of securities issued directly by or deemed to be guaranteed by government entities such as U.S and non U.S. agency securities, government bonds and treasury securities. Level 2 securities are valued using information obtained from a pricing service, which obtains quoted market prices for similar instruments or non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or various other methodologies, such as weighting and other models, to determine the appropriate value at the measurement date. We periodically perform supplemental analysis to validate information obtained from our pricing service. As of May 31, 2012, no adjustments were made to such pricing information.

Level 3 assets consisted primarily of semiconductor equipment and facilities classified as held for sale. Fair value for semiconductor equipment was based on quotations obtained from equipment dealers, which consider the remaining useful life and configuration of the equipment. Fair value for facilities was determined based on sales of similar facilities and properties in comparable markets. Losses recognized in the third quarters and first nine months of 2012 and 2011 due to fair value measurements using Level 3 inputs were not significant. For the third quarter and first nine months of 2012, activity of assets held for sale was not significant.

Marketable equity securities included approximately 20 million ordinary shares of Tower Semiconductor Ltd. ("Tower") received in connection with our sale of our wafer fabrication facility in Japan in June 2011. As of September 1, 2011, the shares were valued using quoted market prices in an active market and discounted using a protective put model for our resale restriction (Level 2). During the second quarter of 2012, the resale restrictions lapsed for 5 million of the shares, which were valued using quoted market prices (Level 1) as of May 31, 2012.

Fair Value Measurements on a Nonrecurring Basis

Our non-marketable securities, equity method investments, and non-financial assets such as intellectual property and property, plant and equipment are carried at cost unless impairment is deemed to have occurred.

During the third quarter and first nine months of 2012 we evaluated the fair value of equipment associated with certain sale-leaseback transactions and fair value approximated book value of $42 million and $199 million, respectively, and no significant losses were recognized on our sale-leaseback transactions. The fair value was determined based on various unobservable inputs such as price quotations obtained from tool suppliers for similar tools, historical cost of the tools, pricing indexes, technological obsolescence and usage (Level 3).

During the third quarter of 2012, we identified events and circumstances that significantly impacted the fair value of our equity investment in Transform. As a result, we measured the fair value of our investment in Transform based on liquidation values of its assets and liabilities using unobservable inputs. As of May 31, 2012, the fair value of the assets of Transform approximated the fair value of its liabilities and we recognized an other than temporary impairment charge of $69 million in the third quarter of 2012. As of May 31, 2012, the carrying value of our investment in Transform was zero.

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (carrying value excludes the equity component of the 2014 Notes, the 2027 Notes, the 2031 Notes, and the 2032 Notes, which is classified in equity) were as follows:

 
 
May 31, 2012
 
September 1, 2011
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Convertible debt instruments
 
$
2,715

 
$
2,414

 
$
1,845

 
$
1,578

Other debt instruments
 
795

 
784

 
436

 
423


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


Equity Plans

As of May 31, 2012, we had an aggregate of 184.5 million shares of common stock reserved for the issuance of stock options and restricted stock awards, of which 106.3 million shares were subject to outstanding awards and 78.2 million shares were available for future awards.  Awards are subject to terms and conditions as determined by our Board of Directors.

Stock Options

We granted 0.8 million and 21.2 million stock options during the third quarter and first nine months of 2012, respectively, with weighted-average grant-date fair values per share of $3.66 and $3.18, respectively. We granted 0.2 million and 15.1 million stock options during the third quarter and first nine months of 2011, respectively, with weighted-average grant-date fair values per share of $5.14 and $4.47, respectively.

The fair values of option awards were estimated as of the dates of grant using the Black-Scholes option valuation model.  The Black-Scholes model requires the input of assumptions, including the expected stock price volatility and estimated option life.  The expected volatilities utilized were based on implied volatilities from traded options on our stock and on historical volatility.  Since 2009, the expected lives of options granted were based, in part, on historical experience and on the terms and conditions of the options.  Prior to 2009, the expected lives of options granted were based on the simplified method provided by the Securities and Exchange Commission.  The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at the time of the grant.  No dividends were assumed in estimated option values.  Assumptions used in the Black-Scholes model are presented below:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Average expected life in years
 
5.0

 
5.0

 
5.1

 
5.1

Weighted-average expected volatility
 
61
%
 
57
%
 
66
%
 
56
%
Weighted-average risk-free interest rate
 
0.9
%
 
2.0
%
 
1.0
%
 
1.8
%

Restricted Stock and Restricted Stock Units ("Restricted Stock Awards")

As of May 31, 2012, there were 9.6 million shares of Restricted Stock Awards outstanding, of which 2.2 million were performance-based Restricted Stock Awards.  For service-based Restricted Stock Awards, restrictions generally lapse in one-fourth increments during each year of employment after the grant date.  For performance-based Restricted Stock Awards, vesting is contingent upon meeting certain performance goals.  Restricted Stock Awards granted for the third quarters and first nine months of 2012 and 2011 were as follows:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Service-based awards
 
0.1

 

 
3.9

 
4.3

Performance-based awards
 

 

 
1.9

 
1.2

Weighted-average grant-date fair values per share
 
$
6.82

 
$
10.81

 
$
5.43

 
$
8.74


Stock-based Compensation Expense

Total compensation costs for our equity plans were as follows:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Stock-based compensation expense by caption:
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
5

 
$
5

 
$
17

 
$
15

Selling, general and administrative
 
12

 
9

 
41

 
29

Research and development
 
4

 
5

 
13

 
13

 
 
$
21

 
$
19

 
$
71

 
$
57

 
 
 
 
 
 
 
 
 
Stock-based compensation expense by type of award:
 
 

 
 

 
 
 
 
Stock options
 
$
13

 
$
11

 
$
44

 
$
32

Restricted stock awards
 
8

 
8

 
27

 
25

 
 
$
21

 
$
19

 
$
71

 
$
57


Selling, general and administrative expense for the third quarter and first nine months of 2012 included $4 million and $13 million, respectively, from the vesting of restricted stock and stock options in connection with the death of our former Chief Executive Officer.

As of May 31, 2012, $156 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards was expected to be recognized through the third quarter of 2016, resulting in a weighted-average period of 1.3 years.  Stock-based compensation expense in the above presentation does not reflect any significant income tax benefits, which is consistent with our treatment of income or loss from our U.S. operations.  (See "Income Taxes" note.)


Other Operating (Income) Expense, Net

Other operating (income) expense consisted of the following:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Loss from termination of lease to IMFT
 
$
17

 
$

 
$
17

 
$

(Gain) loss on disposition of property, plant and equipment
 
4

 
(7
)
 
10

 
(23
)
(Gain) loss from changes in currency exchange rates
 
1

 
(1
)
 
14

 
6

Gain from disposition of Japan Fab
 

 
(54
)
 

 
(54
)
Samsung patent cross-license agreement
 

 
(35
)
 

 
(275
)
Other
 
16

 
(24
)
 
22

 
(42
)
 
 
$
38

 
$
(121
)
 
$
63

 
$
(388
)

In the first quarter of 2011, we entered into a 10-year patent cross-license agreement with Samsung Electronics Co. Ltd. ("Samsung") under which we received a total of $275 million of cash.  For the third quarter and first nine months of 2011, other operating income included gains of $35 million and $275 million, respectively, for cash received from Samsung under the agreement. The license is a life-of-patents license for existing patents and applications, and a 10-year term license for all other patents.

On June 2, 2011, we sold our wafer fabrication facility in Japan (the "Japan Fab") to Tower. Under the arrangement, Tower paid $40 million in cash, approximately 20 million of Tower ordinary shares, and $20 million in installment payments, which we received in the second and third quarters of 2012. We recorded a gain of $54 million (net of transaction costs of $3 million) in connection with the sale of the Japan Fab.


Other Non-Operating Income (Expense), Net

Other non-operating income for the first nine months of 2012 included $39 million in net gains from the disposition of noncurrent equity investments. Other non-operating income for the third quarter of 2011 included $15 million for the termination of our debt guarantee obligation that we recorded in connection with our acquisition of Numonyx in the third quarter of 2010. Other non-operating expense for the first nine months of 2011 included a $111 million loss recognized in the first quarter of 2011 in connection with a series of debt restructure transactions with certain holders of our convertible notes. (See "Debt" note.)


Income Taxes

Income taxes for the third quarter and first nine months of 2012 included tax benefits of $42 million and $56 million, respectively, related to the favorable resolution of certain prior year tax matters, which were previously reserved as an uncertain tax position.

Income tax provision in the third quarter of 2011 included a net charge of $74 million, of which $27 million was related to the gain on the disposition of the Japan Fab and $47 million was to record a valuation allowance against certain remaining deferred tax assets at our Japanese subsidiary. Income tax provision in the third quarter and first nine months of 2011 included charges of $5 million and $45 million, respectively, in connection with the Samsung cross-license agreement.  Income taxes for the second quarter of 2011 included a charge to reduce net deferred tax assets by $19 million in connection with a change in certain tax rates.

Remaining taxes in the third quarter and first nine months of 2012 and 2011 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.  Taxes attributable to our U.S. operations in the third quarter and first nine months of 2012 and 2011 were substantially offset by changes in the valuation allowance.


Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding.  Diluted earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding plus the dilutive effects of equity awards, convertible notes and escrow shares.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from diluted earnings per share calculations.  Antidilutive potential common shares that could dilute basic earnings per share in the future were 379.7 million for the third quarter and first nine months of 2012, and 151.5 million and 165.6 million for the third quarter and first nine months of 2011, respectively.

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 31,
2012
 
June 2,
2011
 
May 31,
2012
 
June 2,
2011
Net income (loss) available to Micron shareholders – Basic
 
$
(320
)
 
$
75

 
$
(789
)
 
$
302

Net effect of assumed conversion of debt
 

 
2

 

 
5

Net income (loss) available to Micron shareholders – Diluted
 
$
(320
)
 
$
77

 
$
(789
)
 
$
307

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
 
987.3

 
998.9

 
983.9

 
986.6

Net effect of dilutive equity awards, escrow shares and assumed conversion of debt
 

 
42.8

 

 
50.3

Weighted-average common shares outstanding – Diluted
 
987.3