Crucial 2014 Annual Report Download - page 62

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Inotera
We have partnered with Nanya in Inotera, a Taiwan DRAM memory company, since 2009. In 2012, we contributed $170
million to Inotera, which increased our ownership percentage to 40%. In 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, which was in
excess of our carrying value per share. As a result of the issuance, our ownership interest decreased from 40% to 35% and we
recognized a non-operating gain of $48 million in 2013. On May 15, 2014, Inotera issued 400 million common shares in a
public offering at a price equal to 31.50 New Taiwan dollars per share, which was in excess of our carrying value per share. As
a result of the issuance, our ownership interest decreased from 35% to 33% and we recognized a non-operating gain of $93
million in 2014. As of August 28, 2014, we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a
33% ownership interest and the remaining ownership interest in Inotera was publicly held.
As of August 28, 2014, the market value of our equity interest in Inotera was $3.72 billion based on the closing trading
price of 51.90 New Taiwan dollars per share in an active market. As of August 28, 2014 and August 29, 2013, there were gains
of $44 million and $44 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 our earnings through equity in net
income (loss) of equity method investees (the "Inotera Amortization"). For 2012, we recognized $48 million of Inotera
Amortization and as of August 30, 2012, the remaining amount of unrecognized Inotera Amortization was not significant.
Through December 2012, we purchased 50% of Inotera's wafer production capacity based on a margin-sharing formula
among Nanya, Inotera and us. Since January 2013, we have purchased substantially all of Inotera's DRAM output at a discount
from market prices for our comparable components under a new supply agreement (the "Inotera Supply Agreement"). Our
costs for supply from Inotera increased in 2014 from 2013 due to changes in average selling prices for our DRAM products and
the changes in the pricing terms. The Inotera Supply Agreement has a three-year term (currently through December 2016) that
contemplates annual negotiations with respect to potential successive one-year extensions. If the parties do not agree to an
extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down
period. In the event of a wind-down, our share of Inotera's capacity would decline over the wind-down period. In 2014, our
cost of products purchased from Inotera was significantly higher than our cost of similar products manufactured in our wholly-
owned facilities. We are currently in negotiations regarding the extension of the Inotera Supply Agreement. There can be no
assurance that we will be able to reach an agreement. Under the Inotera supply agreements, we purchased $2.68 billion,
$1.26 billion and $646 million of DRAM products in 2014, 2013 and 2012 respectively.
Pursuant to a DRAM R&D joint development program with Nanya, which was effective through December 31, 2012, our
R&D costs were reduced by $19 million and $138 million in 2013 and 2012, respectively. Nanya ceased participating in the
DRAM joint development program after December 31, 2012.
Tera Probe
In 2013, as part of the MMJ Acquisition, we acquired a 40% interest in Tera Probe, which provides semiconductor wafer
testing and probe services to us and others. The initial net carrying value of our investment was less than our proportionate
share of Tera Probe's equity and the difference is being amortized as a credit to our earnings through equity in net income (loss)
of equity method investees (the "Tera Probe Amortization"). As of August 28, 2014, the remaining balance of the Tera Probe
Amortization was $26 million and is expected to be amortized over a weighted-average period of 6 years.
As of August 28, 2014, the market value of our equity interest in Tera Probe was $39 million based on the closing trading
price of 1,087 yen per share in an active market and was $9 million below our carrying value. We evaluated our investment in
Tera Probe and concluded that the decline in the market value below our carrying value was not an other-than-temporary
impairment primarily because of the limited amount of time the fair value was below the carrying value and historical volatility
of Tera Probe's stock price.
We incurred manufacturing costs for 2014 and 2013 of $117 million and $13 million, respectively, for services performed
by Tera Probe.