Crucial 2015 Annual Report Download - page 40

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Inotera Supply Agreements: Since January 2013, we have purchased all of Inotera's DRAM output at prices reflecting
discounts from market prices for our comparable components under a supply agreement. In the second quarter of 2015, we
executed the 2016 Supply Agreement, to be effective beginning on January 1, 2016, which will replace the current agreement.
Under the 2016 Supply Agreement, the price for DRAM products sold to us will be based on a formula that equally shares
margin between Inotera and us. The 2016 Supply Agreement has an initial two-year term, followed by a three-year wind-down
period, and contemplates negotiations in late 2016 with respect to a two-year extension, and annual negotiations thereafter with
respect to successive one-year extensions. Upon termination of the initial two-year term of the 2016 Supply Agreement, or any
extensions, we would purchase DRAM from Inotera during the wind-down period. Our share of Inotera's capacity would
decline over the wind-down period. We purchased $2.37 billion of DRAM products from Inotera in 2015 under the current
agreement. The current agreement does not contain a fixed or minimum purchase quantity as quantities are based on qualified
production output and pricing fluctuates as it is based on market prices. Therefore, we did not include any amounts under the
current agreement in the contractual obligations table above. Under the 2016 Supply Agreement, payments are primarily based
on fluctuating quantities and prices, but a portion of the expected costs under the agreement meet the criteria of a minimum
lease payment under an operating lease and are included in the table above.
Off-Balance Sheet Arrangements
We have entered into capped calls, which are intended to reduce the effect of potential dilution from our convertible notes.
The capped calls provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our
stock is above a specified initial strike price at the expiration dates. The amounts receivable varies based on the trading price of
our stock, up to specified cap prices. The dollar value of the cash or shares that we would receive from the capped calls on
their expiration dates ranges from $0 if the trading price of our stock is below the initial strike price for all of the capped calls
to $814 million if the trading price of our stock is at or above the cap price for all of the capped calls. We paid $57 million in
2011, $103 million in 2012, and $48 million in 2013 to purchase capped calls. The amounts paid were recorded as charges to
additional capital. For further details of our capped call arrangements, see "Item 8. Financial Statements and Supplementary
Data – Notes to Consolidated Financial Statements – Equity – Micron Shareholders' Equity – Capped Calls."
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related
disclosures. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that
we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or
conditions. We evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies
below are critical in the portrayal of our financial condition and results of operations and requires management's most difficult,
subjective, or complex judgments.
Business Acquisitions: Accounting for acquisitions requires us to estimate the fair value of consideration paid and the
individual assets and liabilities acquired, which involves a number of judgments, assumptions, and estimates that could
materially affect the amount and timing of costs recognized. Accounting for acquisitions can also involve significant judgment
to determine when control of the acquired entity is transferred. We typically obtain independent third party valuation studies to
assist in determining fair values, including assistance in determining future cash flows, appropriate discount rates, and
comparable market values. The items involving the most significant assumptions, estimates, and judgments included
determining the fair value of the following:
• Property, plant, and equipment, including determination of values in a continued-use model;
• Deferred tax assets, including projections of future taxable income and tax rates;
• Inventory, including estimated future selling prices, timing of product sales, and completion costs for work in process;
• Debt, including discount rate and timing of payments; and
• Intangible assets, including valuation methodology, estimations of future revenue and costs, profit allocation rates
attributable to the acquired technology, and discount rates.