News Column

MICRON TECHNOLOGY INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 3, 2014

As used herein, "we," "our," "us" and similar terms refer to Micron Technology, Inc. and its subsidiaries, unless the context indicates otherwise. The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in "Operating Expenses and Other" regarding SG&A expenses, R&D expenses and Restructure and Asset Impairments for the fourth quarter of 2014, regarding our expected gain in our fourth quarter of 2014 on Inotera's issuance of stock and regarding proceeds and gain from On Semiconductor's acquisition of our interest in Aptina; in "Liquidity and Capital Resources" 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 our pursuit of additional financing and debt restructuring, regarding capital spending in 2014 and regarding the timing of payments for certain contractual obligations. Our actual results could differ materially from our historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Part II, Item 1A. Risk Factors." This discussion should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended August 29, 2013. All period references are to our fiscal periods unless otherwise indicated. Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31 and fiscal 2014 and 2013 each contain 52 weeks. All production data includes the production of IMFT and Inotera. All tabular dollar amounts are in millions. Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:



Overview: An overview of our business and operations and highlights of

key transactions and events.

Results of Operations: An analysis of our financial results consisting of

the following: Consolidated results;



Operating results by business segment;

Operating results by product; and

Operating expenses and other.

Liquidity and Capital Resources: An analysis of changes in our balance

sheet and cash flows and discussion of our financial condition and

potential sources of liquidity.

Recently Issued Accounting Standards

Overview We are one of the world's leading providers of advanced semiconductor solutions. Through our worldwide operations, we manufacture and market a full range of DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. We market our products through our internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers ("OEMs") and retailers located around the world. Our success is largely dependent on the market acceptance of our diversified portfolio of semiconductor products, efficient utilization of our manufacturing infrastructure, successful ongoing development of advanced product and process technologies and generating a return on research and development ("R&D") investments. We obtain products from three primary sources: (1) production from our wholly-owned manufacturing facilities, (2) production from our joint venture manufacturing facilities, and (3) to a lesser degree, from third party manufacturers. In recent years, we have increased our manufacturing scale and product diversity through strategic acquisitions and various partnering arrangements, including joint ventures. 35 -------------------------------------------------------------------------------- We make significant investments to develop the proprietary product and process technologies that are implemented in our worldwide manufacturing facilities and through our joint ventures. These investments enable our production of semiconductor products with increasing functionality and performance at lower costs. We generally reduce the manufacturing cost of each generation of product through advancements in product and process technology such as our leading-edge line-width process technology and innovative array architecture. We continue to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption, improved read/ write reliability and increased memory density. To leverage our significant investments in R&D, we have formed, and may continue to form, strategic joint ventures that allow us to share the costs of developing memory product and process technologies with joint venture partners. In addition, from time to time, we also sell and/or license technology to other parties. We continue to pursue additional opportunities to monetize our investment in intellectual property through partnering and other arrangements.



Business Segments

In the third quarter of 2014, we reorganized our business units. All prior period amounts reflect this reorganization. After the reorganization, we have the following four reportable segments:

Compute and Networking Business Unit ("CNBU"): Includes DRAM and NOR Flash products sold to the compute, networking, graphics, and cloud server markets, as well as NAND Flash products sold primarily into the networking market. Storage Business Unit ("SBU"): Includes NAND Flash components and Solid State Drives ("SSDs") sold into enterprise and client storage, and cloud and removable storage markets. SBU also includes NAND Flash products sold to Intel through our IM Flash Technologies, LLC ("IMFT") joint venture. Mobile Business Unit ("MBU"): Includes DRAM, NAND Flash, and NOR Flash products sold to the smartphone, feature phone, and tablet mobile-device market. 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.

Acquisition of Micron Memory Japan, Inc.

On July 31, 2013, we acquired Elpida Memory, Inc. ("Elpida"), now known as Micron Memory Japan, Inc. ("MMJ"), and 89% of Rexchip Electronics Corporation ("Rexchip''), now known as Micron Memory Taiwan Co., Ltd. ("MMT"), for an aggregate of $949 million in cash (collectively, the "MMJ Acquisition"). In the second and third quarters of 2014, we purchased an additional aggregate 10.6% of MMT's outstanding common stock, after which we owned 99.5% of the outstanding common stock of MMT. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Micron Memory Japan, Inc." note.) MMJ's assets include, among others, a 300mm DRAM wafer fabrication facility located in Hiroshima, Japan and an assembly and test facility located in Akita, Japan. MMT's assets include a 300mm DRAM wafer fabrication facility in Taichung City, Taiwan. The MMJ and MMT fabrication facilities together represent approximately 30% of our wafer capacity. MMJ's semiconductor memory products include Mobile DRAM targeted toward mobile phones and tablets. MMJ's operations are included primarily in the MBU and CNBU segments. Our results of operations for the fourth quarter 2013 included approximately one month of operating results from the acquired MMJ operations. Our results of operations for the fourth quarter 2013 included a gain of $1.48 billion on the MMJ Acquisition. 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 the second quarter of 2014 included these measurement period adjustments of $33 million. 36 -------------------------------------------------------------------------------- MMJ and its wholly-owned subsidiary, Micron Akita, Inc. ("MAI" and, together with MMJ, the "MMJ Companies") are currently subject to corporate reorganization proceedings under the Corporate Reorganization Act of Japan. Because the plans of reorganization of the MMJ Companies provide for ongoing payments to creditors following the closing of the MMJ Acquisition, these proceedings are continuing, and the MMJ Companies remain subject to the oversight of the Tokyo District Court (the "Japan Court") and of the trustees appointed by the Japan Court (including a trustee designated by us, who we refer to as the business trustee, and a trustee designated by the Japan Court, who we refer to as the legal trustee), pending completion of the reorganization proceedings. As a result of this oversight and related consent rights of the Japan Court and the legal trustee, our ability to effectively integrate the MMJ Companies as part of our global operations or to cause the MMJ Companies to take certain actions that we deem advisable for their businesses could be adversely affected if the Japan Court or the legal trustee is unwilling to consent to various actions. For more information, see "Part II, Item 1. Legal Proceedings - Reorganization Proceedings of the MMJ Companies" and "Part II, Item 1A. Risk Factors." Results of Operations Consolidated Results Third Quarter Second Quarter Nine Months 2014 % of net sales 2013 % of net sales 2014 % of net sales 2014 % of net sales 2013 % of net sales (dollar amounts in millions) Net sales $ 3,982 100 % $ 2,318 100 % $ 4,107 100 % $ 12,131 100 % $ 6,230 100 % Cost of goods sold 2,614 66 % 1,762 76 % 2,704 66 % 8,079 67 % 5,091 82 % Gross margin 1,368 34 % 556 24 % 1,403 34 % 4,052 33 % 1,139 18 % SG&A 174 4 % 127 5 % 177 4 % 527 4 % 369 6 % R&D 349 9 % 226 10 % 344 8 % 1,013 8 % 664 11 % Restructure and asset impairments 9 - % 55 2 % 12 - % 18 - % 94 2 % Other operating (income) expense, net (3 ) - % (1 ) - % 1 - % 235 2 % (17 ) - % Operating income 839 21 % 149 6 % 869 21 % 2,259 19 % 29 - % Interest income (expense), net (75 ) (2 )% (52 ) (2 )% (77 ) (2 )% (248 ) (2 )% (159 ) (3 )% Other non-operating income (expense), net (21 ) (1 )% (45 ) (2 )% (122 ) (3 )% (223 ) (2 )% (263 ) (4 )% Income tax (provision) benefit (72 ) (2 )% 1 - % (63 ) (2 )% (215 ) (2 )% (3 ) - % Equity in net income (loss) of equity method investees 135 3 % (10 ) - % 134 3 % 355 3 % (120 ) (2 )% Net income attributable to noncontrolling interests - - % - - % (10 ) - % (33 ) - % (2 ) - % Net income (loss) attributable to Micron $ 806 20 % $ 43 2 % $ 731 18 % $ 1,895 16 % $ (518 ) (8 )% 37

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Net Sales Third Quarter Second Quarter Nine Months % of net % of net % of net % of net % of net 2014 sales 2013 sales 2014 sales 2014 sales 2013 sales CNBU $ 1,857 47 % $ 902 39 % $ 1,835 45 % $ 5,436 45 % $ 2,244 36 % SBU 867 22 % 725 31 % 901 22 % 2,573 21 % 2,044 33 % MBU 757 19 % 269 12 % 908 22 % 2,717 22 % 744 12 % EBU 467 12 % 338 15 % 422 10 % 1,298 11 % 925 15 % All Other 34 - % 84 3 % 41 1 % 107 1 % 273 4 % $ 3,982 100 % $ 2,318 100 % $ 4,107 100 % $ 12,131 100 % $ 6,230 100 % Total net sales for the third quarter of 2014 decreased 3% as compared to the second quarter of 2014 as a result of declines in MBU and SBU gigabit sales volumes. Total net sales for the third quarter and first nine months of 2014 increased 72% and 95%, respectively, as compared to the corresponding periods of 2013 primarily due to higher CNBU and MBU sales resulting from the MMJ Acquisition. Net sales for the third quarter and first nine months of 2014 also benefitted, as compared to the corresponding periods of 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 Memories, Inc. ("Inotera").



Gross Margin

Our overall gross margin percentage of 34% for the third quarter of 2014 was substantially unchanged from the second quarter of 2014 as the gross margins for all of our reportable segments were relatively stable. Our overall gross margin percentage improved to 34% for the third quarter of 2014 from 24% for the third quarter of 2013 primarily due to improvements in the gross margin percentage for MBU and CNBU as a result of higher margins for DRAM products. Our overall gross margin percentage improved to 33% for the first nine months of 2014 from 18% for the first nine months of 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 the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 resulted from the MMJ Acquisition, manufacturing cost reductions and higher average selling prices for CNBU. We purchase substantially all of the DRAM output of our Inotera joint venture at a discount from market prices for our comparable components. Our costs for Inotera product for the third quarter of 2014 decreased from the second quarter of 2014 but were significantly higher than for the third quarter of 2013 due to changes in average selling prices for our DRAM products and to changes in the terms of our supply agreement with Inotera. In the second quarter of 2013, we entered into a new supply agreement with Inotera under which we are obligated to purchase substantially all of Inotera's DRAM output at a discount from market prices for our comparable components over an initial three-year term (the "Inotera Supply Agreement"). The Inotera Supply Agreement replaced a previous supply agreement under which Inotera sold product at pricing based on a margin-sharing formula among Nanya, Inotera and us. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive one-year extensions and in the second quarter of 2014, we renewed our supply agreement with Inotera, which extended the initial period that we will purchase substantially all of Inotera's DRAM output through December 2016. For the third quarter of 2014, our costs for Inotera product were significantly higher than our manufacturing costs for similar products at our wholly-owned fabrication facilities. From the fourth quarter of 2013 through the second quarter of 2014, our costs of goods sold for DRAM products were adversely impacted by the sale of inventories obtained in the MMJ Acquisition. In accounting for the MMJ Acquisition, inventories were recorded at fair value (based on their estimated future selling prices, estimated costs to complete and other factors), which was approximately $200 million higher than the manufacturing cost of such inventories. As a result, our costs of goods sold were adversely affected by approximately $42 million for the second quarter of 2014, $111 million for the first quarter of 2014 and $41 million for the fourth quarter of 2013 as those inventories were sold. 38

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Operating Results by Business Segments

Compute and Networking Business Unit ("CNBU")

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Net sales $ 1,857$ 902 $ 1,835 $ 5,436$ 2,244 Operating income 531 129 504 1,462 1 CNBU sales and operating results track closely with our average selling prices, gigabit sales volumes and cost per gigabit for our sales of DRAM products. (See "Operating Results by Product - DRAM" for further detail.) CNBU sales for the third quarter of 2014 were relatively unchanged from the second quarter of 2014 as slight increases in gigabit sales volumes due to higher production output were offset by declines in average selling prices. Increases in production output for the third quarter of 2014 reflect a shift in DRAM production from mobile DRAM to computing DRAM and improvements in product and process technologies, partially offset by the transition of one of our Singapore wafer fabrication facilities from DRAM to NAND Flash. CNBU operating income for the third quarter of 2014 improved from the second quarter of 2014 primarily due to higher gross margins for DRAM products. CNBU sales for the third quarter and first nine months of 2014 increased 106% and 142%, respectively, as compared to the corresponding periods of 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 the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 were adversely impacted by the transition of one of our Singapore wafer fabrication facilities from DRAM to NAND Flash. CNBU operating income for the third quarter and first nine months of 2014 improved from the corresponding periods of 2013 primarily due to the MMJ Acquisition, higher average selling prices and manufacturing cost reductions.



Storage Business Unit ("SBU")

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Net sales $ 867$ 725 $ 901 $ 2,573$ 2,044 Operating income 55 55 79 228 127 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 the third quarter of 2014 decreased 4% from the second quarter of 2014 primarily due to decreases in gigabits sold. Decreases in gigabits sold for the third quarter of 2014 were primarily due to a shift to a higher mix of products sold in the form of SSDs which have longer manufacturing cycle times. SBU sells a portion of its products to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. SBU sales to Intel under this arrangement were $107 million for the third quarter of 2014, $104 million for the second quarter of 2014 and $89 million for the third quarter of 2013. 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 the third quarter of 2014 decreased 5% as compared to the second quarter of 2014 primarily due to decreases in gigabits sold. SBU operating income for the third quarter of 2014 declined from the second quarter of 2014 primarily due to higher research and development costs. SBU sales of NAND Flash products to trade customers for the third quarter and first nine months of 2014 increased 21% and 29%, respectively, as compared to the corresponding periods of 2013 primarily due to an increase in gigabits sold partially offset by declines in average selling prices. SBU operating income for the first nine months of 2014 improved from the corresponding period of 2013 primarily due to increased gross margins generated from higher gigabit sales. 39 --------------------------------------------------------------------------------



Mobile Business Unit ("MBU")

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Net sales $ 757$ 269 $ 908 $ 2,717$ 744 Operating income (loss) 135 (62 ) 178 479 (212 ) In the third quarter of 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 the third quarter of 2014 decreased 17% as compared to the second quarter of 2014 primarily due to decreases in gigabit sales and declines in average selling prices for mobile DRAM products. The decline in gigabits sold in the third quarter of 2014 was primarily due to a shift in DRAM production from mobile DRAM to computing DRAM and reduced production because of an earthquake, which temporarily disrupted our Hiroshima wafer fabrication facility. MBU operating income for the third quarter of 2014 declined from the second quarter of 2014 primarily due to the lower sales volumes. MBU sales for the third quarter and first nine months of 2014 increased 181% and 265%, respectively, as compared to the corresponding periods of 2013 primarily due to the MMJ Acquisition. MBU operating margin for the third quarter and first nine months of 2014 also improved from the corresponding periods of 2013 primarily due to the MMJ Acquisition.



Embedded Business Unit ("EBU")

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Net sales $ 467$ 338 $ 422 $ 1,298$ 925 Operating income 96 56 80 254



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In the third quarter of 2014, EBU sales were comprised of DRAM, NAND Flash and NOR Flash in decreasing order of revenue. EBU sales for the third quarter of 2014 increased 11% as compared to the second quarter of 2014 primarily due to increases in sales volumes partially offset by declines in average selling prices. EBU operating income for the third quarter of 2014 improved from the second quarter of 2014 primarily due to increased margins from sales of NOR Flash and DRAM products as a result of higher sales volumes, partially offset by declines in average selling prices. EBU sales for the third quarter and first nine months of 2014 increased 38% and 40%, respectively, as compared to the corresponding periods of 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 the third quarter and first nine months of 2014 improved as compared to the corresponding periods of 2013 primarily due to higher margins on sales of DRAM and NAND Flash products as a result of cost reductions.



Operating Results by Product

Net Sales by Product Third Quarter Second Quarter Nine Months % of net % of net % of net % of net % of net 2014 sales 2013 sales 2014 sales 2014 sales 2013 sales DRAM $ 2,729 69 % $ 1,098 47 % $ 2,785 68 % $ 8,308 68 % $ 2,709 43 % NAND Flash 1,097 28 % 936 40 % 1,154 28 % 3,309 27 % 2,609 42 % NOR Flash 116 3 % 194 8 % 116 3 % 377 3 % 619 10 % Other 40 - % 90 5 % 52 1 % 137 2 % 293 5 % $ 3,982 100 % $ 2,318 100 % $ 4,107 100 % $ 12,131 100 % $ 6,230 100 % 40

-------------------------------------------------------------------------------- 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 First Nine Third Quarter 2014 Months 2014 Versus Versus Second Third First Nine Quarter Quarter Months 2014 2013 2013 (percentage change from period indicated) Net sales (2 )% 149 % 207 % Average selling prices per gigabit (2 )% 2 % 11 % Gigabits sold - % 142 % 176 % Cost per gigabit (3 )% (17 )% (20 )% Gigabit sales of DRAM products for the third quarter of 2014 were essentially unchanged from the second quarter of 2014, as higher production volumes resulting from improved product and process technologies were offset by lost production at our Hiroshima fabrication facility due to an earthquake and the transition of one of our wafer fabrication facilities in Singapore from DRAM to NAND Flash. The increase in gigabit sales of DRAM products for the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 was primarily due to higher production volumes resulting from the MMJ Acquisition, the effect of 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. Effective on January 1, 2013, we entered into the new Inotera Supply Agreement under which we purchase substantially all of Inotera's DRAM output at a discount from market prices for our comparable components over an initial three-year term. Prior to the new Inotera Supply Agreement we had the right to purchase 50% of Inotera's wafer production capacity based on a margin-sharing formula among Nanya, Inotera and us. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Equity Method Investments" note.) Our cost of products purchased from Inotera under these supply agreements was $700 million for the third quarter of 2014, $714 million for the second quarter of 2014 and $341 million for the third quarter of 2013. Our cost of products purchased from Inotera for the third quarter of 2014 decreased from the second quarter of 2014 but was significantly higher than our cost of similar products manufactured in our wholly-owned facilities in the third and second quarters of 2014. DRAM products acquired from Inotera accounted for 40% of our DRAM gigabit production for the third quarter of 2014 as compared to 37% for the second quarter of 2014 and 62% for the third quarter of 2013. Our gigabit production and sales volumes of DRAM products have increased significantly in 2014 as compared to 2013 due to our MMJ Acquisition. MMJ and MMT have 300mm wafer fabrication facilities in Japan and Taiwan, respectively, that are dedicated to the production of DRAM products. In the third quarter of 2014, DRAM products produced by these facilities constituted 52% of our aggregate DRAM gigabit production. Our gross margin percentage on sales of DRAM products for the third quarter of 2014 was relatively unchanged from the second quarter of 2014 as slight reductions in costs from improvements in product and process technologies were offset by declines in average selling prices. Our gross margin percentage on sales of DRAM products for the third quarter and first nine months of 2014 improved from the corresponding periods of 2013 primarily due to manufacturing cost reductions, higher average selling prices and the MMJ Acquisition. 41 --------------------------------------------------------------------------------



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.

First Nine Third Quarter 2014 Months 2014 Versus Versus Second Third First Nine Quarter Quarter Months 2014 2013 2013 (percentage change from period indicated) Sales to trade customers: Net sales (6 )% 18 % 29 % Average selling prices per gigabit - % (29 )% (22 )% Gigabits sold (6 )% 66 % 65 % Cost per gigabit - % (27 )% (24 )% Decreases in NAND Flash gigabits sold to trade customers for the third quarter of 2014 as compared to the second quarter of 2014 were primarily due to a shift to a higher mix of products sold in the form of SSDs which have longer manufacturing cycle times. SSD NAND Flash products generally have higher average selling prices and manufacturing costs per gigabit than other NAND Flash products and, as a result, the shift to a higher mix of SSDs in the third quarter of 2014 also affected changes in these measures. Increases in NAND Flash gigabits sold to trade customers for the third quarter and first nine months of 2014 as compared to the corresponding periods of 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 the third quarter of 2014 was relatively unchanged from the second quarter of 2014 as average selling prices and manufacturing costs were stable. Our gross margin percentage on sales of trade NAND Flash products for the third quarter of 2014 decreased from the third quarter of 2013 as declines in average selling prices outpaced manufacturing cost reductions. Our gross margin percentage on sales of trade NAND Flash products for first nine months of 2014 improved from the corresponding period of 2013 as manufacturing cost reductions outpaced decreases in average selling prices. Manufacturing cost reductions for the third quarter of 2014 as compared to the third quarter of 2013 primarily resulted from improvements in product and process technologies.



NOR Flash

Sales of NOR Flash products for the third quarter and first nine months of 2014 declined as compared to corresponding periods of 2013 primarily due to decreases in sales of wireless products as a result of the continued transition of wireless applications to NAND Flash products. Our gross margin percentage on sales of NOR Flash products for the third quarter of 2014 improved as compared to the second quarter of 2014 primarily due to shifts in product mix. Our gross margin percentage on sales of NOR Flash products for the third quarter and first nine months of 2014 declined as compared to the corresponding periods of 2013 primarily due to costs of underutilized capacity in connection with the decrease in production of wireless products and decreases in average selling prices.



Operating Expenses and Other

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses for the third quarter of 2014 were substantially unchanged as compared to the second quarter of 2014. SG&A expenses for the third quarter and first nine months of 2014 increased 37% and 43%, respectively, from the corresponding periods of 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 $175 million to $185 million for the fourth quarter of 2014. 42

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Research and Development

R&D expenses for the third quarter of 2014 were substantially unchanged as compared to the second quarter of 2014. R&D expenses for the third quarter and first nine months of 2014 increased 54% and 53%, respectively, from the corresponding periods of 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. As a result of amounts reimbursable from Intel under cost-sharing agreements, R&D expenses were reduced by $36 million for the third quarter of 2014, $35 million for the second quarter of 2014 and $33 million for the third quarter of 2013. Pursuant to a cost-sharing arrangement with Nanya effective through December 31, 2012, our R&D costs were reduced by $19 million in the first six months of 2013. Nanya ceased participating in the joint development program in the second quarter of 2013. We expect that R&D expenses, net of amounts reimbursable from our R&D partners, will approximate $355 million to $365 million for the fourth quarter of 2014. Our process technology R&D efforts are focused primarily on development of successively smaller line-width process technologies which are designed to facilitate our transition to next generation memory products. Additional process technology R&D efforts focus on the enablement of advanced computing and mobile memory architectures, the investigation of new opportunities that leverage our core semiconductor expertise and the development of new manufacturing materials. Product design and development efforts include our high density DDR3 and DDR4 DRAM, Mobile Low Power DDR DRAM products, high density NAND Flash memory (including multi-level, triple-level cell and 3D technologies), SSDs, Hybrid Memory Cubes, specialty memory, NOR Flash memory, and other memory technologies and systems.



Restructure and Asset Impairments

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Loss (gain) on impairment of MIT assets $ - $ - $ (5 ) $ (5 )$ 62 Loss (gain) on impairment of LED assets (3 ) 25 - (6 ) 29 Loss on restructure of ST consortium agreement - 26 - - 26 Gain on termination of lease to Transform - - - - (25 ) Other 12 4 17 29 2 $ 9 $ 55 $ 12 $ 18$ 94 For the first nine months of 2014, other restructure included an aggregate of approximately $30 million associated with our efforts to wind down our 200mm operations in Agrate, Italy and Kiryat Gat, Israel. We anticipate incurring restructure charges of $15 million to $25 million in the fourth quarter of 2014 for employee termination benefits in Italy. For the third quarter of 2013, we recognized charges of $25 million, primarily to impair certain production assets used in the development of LED technology, and $26 million in connection with the restructure of a consortium agreement with STMicroelectronics S.r.l. ("ST"), whereby certain assets and approximately 500 employees from our Agrate, Italy fabrication facility were transferred to ST. For the first nine months of 2013, we also recognized a charge of $62 million to impair the assets of Micron Technology Italia, S.r.l. ("MIT"), a wholly-owned subsidiary, to their estimated fair values in connection with the sale of MIT to LFoundry Marsica S.r.l. and a gain of $25 million related to the termination of a lease with Transform Solar Pty Ltd., an equity method investee, to a portion of our manufacturing facilities in Boise, Idaho.



(See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Restructure and Asset Impairments.")

Interest Income (Expense)

Net interest expense for the third quarter of 2014, second quarter of 2014 and third quarter of 2013, included aggregate amounts of amortization of debt discount and other costs of $36 million, $44 million and $28 million, respectively.

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Income Taxes

Income taxes for the third and second quarters of 2014 included $49 million and $55 million, respectively, related to the utilization of deferred tax assets as a result of MMJ's and MMT's operations. Remaining taxes for 2014 and 2013 primarily reflect taxes on our non-U.S. operations. We have a full valuation allowance for our net deferred tax asset associated with our U.S. operations. The provision (benefit) for taxes on U.S. operations in the third quarters and first nine months of 2014 and 2013 was substantially offset by changes in the valuation allowance. As of May 29, 2014, we estimate an increase in unrecognized tax benefits for 2014 of approximately $110 million primarily related to transfer pricing matters. This increase is expected to be substantially offset by a change in our valuation allowance.



Equity in Net Income (Loss) of Equity Method Investees

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

Third Quarter Second Quarter Nine Months 2014 2013 2014 2014 2013 Inotera $ 134$ (13 ) $ 131 $ 349$ (121 ) Tera Probe 2 - 4 8 - Other (1 ) 3 (1 ) (2 ) 1 $ 135$ (10 ) $ 134 $ 355$ (120 ) Our equity in net income (loss) of Inotera improved for the third quarter and first nine months of 2014 as compared to the corresponding periods of 2013 primarily due to Inotera's improved operating results from higher average selling prices to us and lower manufacturing costs. Higher average selling prices resulted from the new Inotera Supply Agreement coupled with an improved market. On May 15, 2014, Inotera issued 400 million common shares in a public offering at a price equal to 31.50 New Taiwan dollars per share, which was in excess of our carrying value per share. We did not purchase any shares in the offering and our ownership interest decreased from 35% to 33%. As a result of Inotera's offering, we will recognize a non-operating gain of approximately $90 million. Because we recognize the effects of our investment in Inotera on a two-month lag, the gain will be recorded in the fourth quarter of 2014. On June 9, 2014, ON Semiconductor Corporation announced that it will pay approximately $400 million to acquire Aptina Imaging Corporation ("Aptina"), a company in which we hold an equity method investment, subject to certain customary closing adjustments. The transaction is expected to close in the fourth quarter of 2014 or first quarter of 2015, subject to required regulatory approvals and customary closing conditions. Upon the successful completion of ON Semiconductor's acquisition of Aptina, we expect to receive proceeds of approximately $100 million, based on our diluted ownership interest of approximately 27%, and recognize a gain approximately equal to the proceeds we receive.



(See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Equity Method Investments.")

Other

In the second quarter of 2014, we settled all pending litigation between us and Rambus, including all antitrust and patent matters, and entered into a patent cross-license agreement. As a result, other operating expense for the first nine months of 2014 included a $233 million charge to accrue a liability, which reflects the discounted value of amounts due under this arrangement. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Contingencies" note.) Other non-operating expense for the third quarter of 2014, second quarter of 2014 and first nine months of 2014 included losses from the restructure of our debt of $16 million, $80 million and $171 million, respectively. Other non-operating expense for the first nine months of 2013 included losses of $31 million from the restructure of our debt. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt" note.) 44 -------------------------------------------------------------------------------- Further discussion of other operating and non-operating income and expense can be found in the following notes contained in "Item 1. Financial Statements - Notes to Consolidated Financial Statements":



Equity Plans

Other Operating (Income) Expense, Net

Other Non-Operating Income (Expense), Net

Liquidity and Capital Resources

May 29, August



29,

As of 2014 2013 Cash and equivalents and short-term investments: Bank deposits $ 3,402$ 1,619 Money market funds 370 1,188 Certificates of deposit 288 47 Corporate bonds 114 112 Government securities 63 72 Commercial paper 25 61 Asset-backed securities 2 2 $ 4,264$ 3,101 Long-term marketable investments $ 545$ 499 Restricted cash: Current $ - $ 556 Noncurrent (included in "Other noncurrent assets") 62 63 $ 62$ 619 Cash and equivalents and short-term investments as of May 29, 2014 included $2.58 billion held by MMJ and its subsidiaries. Substantially all of our restricted cash is held by MMJ for its installment payments to its secured and unsecured creditors. Use of cash and equivalents and restricted cash held by MMJ is subject to limitations described below. 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 Companies and their subsidiaries, while available to satisfy the MMJ Companies' installment payments and the other obligations, capital expenditures and other operating needs of the MMJ Companies and their subsidiaries, are not available for use by us in our other operations. Moreover, certain uses of the assets of the MMJ Companies, including investments in certain capital expenditures and in MMT, may require consent of MMJ's trustees and/or the Japan Court. Cash and equivalents in the table above included $84 million held by IMFT as of May 29, 2014. Our ability to access funds held by IMFT to finance our other operations is subject to agreement by Intel and by contractual limitations. Amounts held by IMFT are not anticipated to be available to finance our other operations. As of May 29, 2014, $3.75 billion of our cash and equivalents and short-term investments was held by foreign subsidiaries, of which $828 million was denominated in currencies other than the U.S. dollar. As of May 29, 2014, we had $3.43 billion of cash and equivalents and short-term investments that was held by foreign subsidiaries whose earnings were considered to be indefinitely reinvested and repatriation of funds to the U.S. would be subject to U.S. federal income taxes. 45 --------------------------------------------------------------------------------



To mitigate credit risk, we invest through high-credit-quality financial institutions and, by policy, generally limit the concentration of credit exposure by restricting investments with any single obligor.

Cash generated by operations is our primary source of liquidity. Our liquidity is highly dependent on selling prices for our products and the timing and level of our capital expenditures, both of which can vary significantly from period to period. Depending on conditions in the semiconductor memory market, our cash flows from operations and current holdings of cash and investments may not be adequate to meet our needs for capital expenditures and operations. In the first nine months of 2014, we obtained $1.06 billion of proceeds from the issuance of debt. In 2013, we obtained $1.12 billion of proceeds from the issuance of debt and $126 million of proceeds from equipment sale-leaseback financing. (See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt.") As of May 29, 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. We expect our cash and investments, cash flows from operations and available financing will be sufficient to meet our requirements at least through the next 12 months. Holders of our outstanding convertible notes can convert the notes during any calendar quarter if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price. As of May 29, 2014, our 2031B Notes, 2033E Notes and 2033F Notes with an aggregate principal amount of $714 million contained contractual terms that require us to pay cash up to the principal amount of the notes upon conversion. These notes met the conversion criteria for the calendar quarter ended March 31, 2014 and, as a result, we reclassified the $626 million carrying value of these notes to current debt and reclassified the $88 million difference between the principal and carrying amount of these convertible notes from additional capital to redeemable convertible notes. These notes also met the conversion criteria for the calendar quarter ended June 30, 2014 and are therefore convertible by the holders through September 30, 2014. We are continuously evaluating alternatives for efficiently financing our capital expenditures and operations and optimizing our balance sheet. We have engaged in the past, and we expect from time to time in the future to engage, in a variety of transactions for such purposes, including the issuance or incurrence of secured and unsecured debt and the refinancing and restructuring of existing debt, including our convertible notes, through exchanges, repurchases, redemptions and conversions. We have used substantial amounts of cash in recent periods in connection with repurchases and conversions of our convertible notes and we could pursue other actions to reduce our outstanding balance of convertible notes, which could require further outlays of cash.



Operating Activities

Net cash provided by operating activities was $4.35 billion for the first nine months of 2014, due primarily to a strong market for our products and our continued focus on cost-efficient operations. Operating cash flows in the first nine months of 2014 also benefitted by a $575 million increase in accounts payable and accrued expenses offset by a $330 million increase in receivables.



Investing Activities

Net cash used for investing activities was $923 million for the first nine months of 2014, which consisted primarily of cash expenditures of $1.52 billion for property, plant and equipment offset by release of restrictions on $534 million of 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 2014 will be approximately $2.8 billion to $3.2 billion. As of May 29, 2014, we had commitments of approximately $1.33 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 for financing activities was $2.23 billion for the first nine months of 2014, which included $3.13 billion for repayments of debt and $292 million of payments on equipment purchase contracts. Cash outflows for these financing activities were partially offset by $1.06 billion of proceeds from issuance of debt and by $247 million of proceeds from issuance of common stock under our equity plans. 46

-------------------------------------------------------------------------------- As of May 29, 2014, under the terms and conditions of the MMJ Companies' plans of reorganization, we are obligated to pay 142 billion yen (or the equivalent of $1.40 billion based on exchange rates as of May 29, 2014) to the external creditors of the MMJ Companies. In October 2013, we made the first installment payment of $534 million to the external creditors of the MMJ Companies from funds that had been held in a restricted cash account since the acquisition date. The remaining installment payments are due at the end of each calendar year beginning in 2014 through 2019.



In the first nine months of 2014, we initiated a series of actions to restructure our debt as follows:

Exchanges: Exchanged approximately $80 million in aggregate principal amount of our 2027 Notes, $155 million in aggregate principal amount of our 2031A Notes and $205 million in aggregate principal amount of our 2031B Notes for $1.03 billion in aggregate principal amount at maturity of new 3.00% Convertible Senior Notes due 2043. Conversions: Settled conversions of a portion of our 2027 Notes, 2031A Notes and 2014 Notes entirely in cash. Principal amounts of debt converted and cash paid on settlement of conversions in the first nine months of 2014 were as follows: Principal Converted Cash Paid on Settlement Second Quarter 2014: 2014 Notes $ 66 $ 109 2027 Notes 95 179 2031A Notes 190 440 351 728 Third Quarter 2014: 2014 Notes 419 718 $ 770 $ 1,446 Repurchases: Repurchased for cash a portion of our 2031B Notes, 2032C Notes and 2032D Notes in privately negotiated transactions. Principal amounts of debt repurchased and cash paid on settlement of conversions in the third and second quarters of 2014 were as follows: Principal Repurchased Cash Paid for Repurchase Second Quarter 2014: 2031B Notes $ 26 $ 65 2032C Notes 100 249 2032D Notes 38 93 164 407 Third Quarter 2014: 2032C Notes 60 142 2032D Notes 39 111 99 253 $ 263 $ 660 47

-------------------------------------------------------------------------------- Other Financing Activities: On December 20, 2013, we issued $462 million in principal amount of 1.258% Secured Notes due January 2019 (the "2019 Notes"). The 2019 Notes mature on January 15, 2019 and are collateralized by certain equipment which had a carrying value of $215 million as of May 29, 2014. The principal amount of the 2019 Notes is payable in 10 consecutive semi-annual installments payable in January and July of each year, commencing in July 2014. The Export-Import Bank of the United States ("Ex-Im Bank") guaranteed payment of all regularly scheduled installment payments of principal of, and interest on, the 2019 Notes. We paid $23 million to Ex-Im Bank for its guarantee upon issuance of the 2019 Notes. On February 5, 2014, we issued $600 million in aggregate principal amount of 5.875% Senior Notes due February 2022 (the "2022 Notes"). We paid issuance costs of $14 million for the 2022 Notes. Interest is payable in February and August. On February 27, 2014, in connection with our acquisition of an additional 9.9% interest in MMT, we recorded a $127 million note payable to the seller for the present value of the monthly installments, from March 2014 through December 2014. See "Item 1. Financial Statements - Notes to Consolidated Financial Statements - Debt.") Contractual Obligations Payments Due by Period As of May 29, Remainder of 2019 and 2014 Total 2014 2015 2016 2017 2018 Thereafter Notes payable (1) (2) $ 6,403 $ 137 $ 635$ 553$ 516$ 709$ 3,853 Capital lease obligations (2) 1,056 105 355 307 86 43 160 Operating leases(3) 120 6 21 18 14 13 48 Total $ 7,579 $ 248 $ 1,011 $



878 $ 616$ 765$ 4,061 (1) Amounts include MMJ creditor installment payments, convertible notes and other notes. Any future redemption or conversion of our convertible notes could impact the timing and amount of cash payments. (2) Amounts reflect principal and interest. (3) Amounts do not include contingent lease payments.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09 - Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in our first quarter of 2018. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements. 48



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