Crucial 2013 Annual Report Download - page 69

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Inotera
We have partnered with Nanya in Inotera, a Taiwanese DRAM memory company, since the first quarter of 2009. In March
2012, we contributed $170 million to Inotera, which increased our ownership percentage to 40%. On May 28, 2013, Inotera
issued 634 million common shares to Nanya and certain of its affiliates in a private placement at a price equal to 9.47 New
Taiwan dollars per share (approximately $0.32 U.S. dollars), which was in excess of our carrying value per share. As a result
of the issuance, our ownership interest decreased to 35% and we recognized a gain of $48 million in 2013. As of August 29,
2013, we held a 35% ownership interest in Inotera, Nanya and certain of its affiliates held a 36% ownership interest and the
remaining ownership interest was publicly held.
As of August 29, 2013 the market value of our equity interest in Inotera was $854 million based on the closing trading
price of its shares in an active market. As of August 29, 2013 and August 30, 2012, there were gains of $44 million and
$49 million, respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our
equity investment in Inotera.
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"). For both 2012 and 2011, we recognized $48 million of Inotera
Amortization. As of August 30, 2012, the remaining amount of unrecognized Inotera Amortization was not significant.
As of June 30, 2013, Inotera's current liabilities exceeded its current assets by $1.0 billion, which exposes Inotera to
liquidity risk. Additionally, Inotera incurred net losses of $541 million for its fiscal year ended December 31, 2012. As of June
30, 2013, Inotera was not in compliance with certain of its loan covenants, and had not been in compliance for the past several
years, which may result in its lenders requiring repayment of such loans during the next year. Inotera has applied for a waiver
from complying with the June 30, 2013 financial covenants. Inotera's management has implemented plans to improve its
liquidity and for Inotera's six-month period ended June 30, 2013, Inotera generated net income of $91 million; however, there
can be no assurance that Inotera will be successful in sufficiently improving its liquidity and complying with their loan
covenants, which may result in its lenders requiring repayment of such loans during the next year.
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.
On January 17, 2013, we entered into agreements with Nanya and Inotera to amend the joint venture relationship involving
Inotera. The amendments included a new supply agreement (the "Inotera Supply Agreement"), retroactively effective
beginning on January 1, 2013, between us and Inotera under which we are obligated to purchase for an initial period through
January, 2016, substantially all of Inotera's output at a purchase price based on a discount from market prices for our
comparable components. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive
one-year extensions and if in any year the parties do not agree to an extension, the agreement will terminate following the end
of the then-existing term plus a subsequent three-year wind-down period. Our share of Inotera's capacity would decline over
the three year wind-down period. Under applicable accounting guidance, the Inotera Supply Agreement is treated as containing
an embedded operating lease with respect to Inotera's production assets during the initial three-year term of the lease. Effective
through December 31, 2012, we had rights and obligations to purchase 50% of Inotera's wafer production capacity based on a
margin-sharing formula among Nanya, Inotera and us. Under these agreements, we purchased $1,260 million, $646 million,
and $641 million of DRAM products in 2013, 2012 and 2011 respectively. In 2012, we recognized losses on our purchase
commitment under the Inotera Supply Agreement of $17 million, $19 million and $40 million in our fourth, second and first
quarters, respectively. In 2011, we recognized purchase commitment losses of $28 million, $3 million, $12 million and
$11 million in the fourth, third, second and first quarters, respectively.
Under a cost-sharing arrangement effective through December 31, 2012, we generally shared DRAM process and design
development costs with Nanya. As a result of the January 17, 2013 agreements, which were retroactively effective beginning
on January 1, 2013, Nanya no longer participates in the joint development program. Pursuant to the cost-sharing arrangement,
our research and development ("R&D") costs were reduced by $19 million, $138 million, and $141 million in 2013, 2012 and
2011, respectively. In addition, we recognized royalty revenue from Nanya of $3 million, $11 million, and $25 million in 2013,
2012 and 2011, respectively, for sales of DRAM products manufactured by or for Nanya on process nodes of 50nm or higher.